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Life Insurance
Keeping Your Legacy Alive with Last Survivor Insurance
By Amy Rose Herrick
Amy Rose Herrick, ChFC, IAR Economic Consultant, Amy Rose Herrick, ChFC, Economic Consultant
Did you know in 2004, the federal government collected more than $25 billion in estate and gift taxes? Although there is no known number for the amount of family fortunes and legacies lost to this form or taxation, rest assured there were legacies that ended needlessly in the remittance of large tax checks due to a lack of planning for the inevitable.
Ignoring this area of any estate plan and hoping for the best is not prudent or wise planning. The best way to deal with the possibility of estate taxes is to plan now.
You may have created an estate monster lurking in the closet you have no idea is waiting patiently for heirs just by the casual nature of how you have titled existing assets, including how you set up ownership on your in force life insurance coverage years, and sometimes decades ago.
I have heard some dry joking that “I’ll just plan to die in 2010 when the state tax is slated to disappear for a year.” I would agree that is a plan, albeit a very poor one. What happens in 12/31/2010 when you decide that seeing that new grandbaby (the first girl in 16 years!) due in two months is a lot more attractive than being hit by a bus and killed before midnight?
The Federal Estate Tax will return to its previous 55% level in 2011. That is of course unless Congress decides to change their mind on the subject. Many people fail to realize how one little vote could change this estate liability issue rather quickly.
How does Last-Survivor Insurance help me?
Survivorship life insurance simply provides immediate cash to heirs for the final estate settlement costs including estate taxes, business buy outs, etc. This policy only pays the benefit after the second spousal death. If the funds are truly not needed until the second death, then this can often be the most cost effective way to insure a future cash need for literally pennies on the dollar.
One particular feature that makes these even more attractive it the fact it is possible to have one person on the policy who is completely uninsurable if they would try to secure coverage on their own merit for any price. This is possible because if you recall, the proceeds would only be payable after the second death.
Are you planning on using the Unlimited Marital Deduction?
Many wills are set up simply to utilize the unlimited marital deduction, so when one spouse dies, his or her entire estate passes to the surviving spouse without becoming subject to estate taxes providing the surviving spouse is a US citizen. This sounds fairly simple and no tax to worry about, or is there?
It is common for the surviving spouse to have received a large amount of what was tax free life insurance when paid. But now what happens if the second spouse dies shortly after and either did not choose to, or was not able to restructure the now one large estate that has also been increased with insurance proceeds from the first spousal death? Now Federal estate taxes reaching up to 46 percent (in 2006) come due on whatever portion of the estate exceeds the prevailing exemption amount which is $2 million in 2006. If there were substantial growth in the surviving spousal estate, without immediate planning and implementation, heirs inheriting an estate now worth $3 million could owe up to $460,000 in federal estate taxes that could have been easily avoided.
Are Estate taxes really all that bad?
Estate taxes are typically due within nine months of the surviving spouse's death. There are exceptions, but they are not free and will actually cost heirs much more if not paid in nine months. Often heirs are forced to sell property at discount prices to meet this deadline, perhaps with reluctance there occurs liquidation of other assets that they would rather of held because right now there is a ready buyer with cash needed, even if the cash is 20% less than market value, or perhaps they are forced to secure loans in order to make the payment on time.
A survivorship life insurance policy would quickly provide cash funds to enable heirs to have a choice of paying the bill with cash rather than liquidating assets, liquidate some assets, or any combination to their advantage when the goal was to preserve hard earned wealth that had taken years to accumulate.
What does this cost?
This will vary based on the amount needed, age of the insured, health of both applicants, type of coverage secured, etc. However, it is important to understand it will only require a small percentage of the estate assets to protect the far larger portion. It could be thought of as asset leverage. Or, with gifting, perhaps a one time single premium, payment is preferred. A few pennies on the dollar is a far better option than 46 cents on the dollar that would be lost otherwise.
Never settle for just one offer either. Shop around and compare. Insurance policies are a product and each has its own pricing, features, benefits and costs. I suggest you apply to at least three companies at the same time, completing just one examination so you will be able to compare offers and select the one that is best for you with a minimum of effort on your part. This is more paper work than submitting just one application, and can be time consuming and somewhat repetitious. Some agents will not want to do this with the idea only one company will be selected in the end for coverage. But, after all, it is only money….YOURS so this strategy will certainly give you the best opportunity to secure the best coverage for your needs.
I also caution clients if the need is already there to not wait for all the offers to come in and to accept the first one paying say perhaps the first minimum required quarterly premium. Generally, you have a 10 or 20 day “free look” period. If a subsequent offer is received and accepted in this time frame, you would receive a full refund of premiums paid. If it is after the free look period, then you may only pay for a short period of time, perhaps one month before the coverage is replaced with a “better” policy. You still benefited from the protection the policy provided.
This survivorship policy coverage should be carefully coordinated with the beneficiary and ownership on all other existing life insurance policies to be most effective.
A final note of caution, never, never cancel or replace any insurance coverage until you have the other coverage in force, in hand and it is indeed in your best interests.
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