Steer Clear of Estate Taxes with Survivorship Life

Depending on the value of your estate, your heirs could face hundreds of thousands of dollars in federal estate taxes. In 2008, the first $2 million of an estate is exempt from estate taxes, and this amount will rise to $3.5 million in 2009. Luckily, the estate tax is scheduled to be eliminated altogether in 2010.

But unless Congress makes a change, the estate tax will be back with a vengeance in 2011—with a much lower $1 million exemption amount. This means an even greater number of families will be burdened with estate taxes upon the death of a loved one. When faced with these often sky-high estate taxes, some families are forced to sell inherited assets, such as a house or car, just to pay off these taxes.

Removing the burden with life insurance

Fortunately, there is a way to ensure your loved ones can receive the inheritance that is rightly theirs: life insurance. That’s because the proceeds from a life insurance policy can be used to pay estate taxes. This removes financial burden from your family and ensures they aren’t left scrambling to raise money for estate taxes.

However, traditional life insurance is far too expensive for many families. It can also be difficult to qualify for a policy, depending on your age, health and lifestyle. For example, if you have a pre-existing health condition, you may not be able to get conventional life insurance—and if you do qualify, you’ll probably have to pay phenomenally expensive premiums. If you find yourself in this predicament, survivorship life insurance may be the ideal solution.

An affordable alternative

Survivorship life insurance is also known as a “second-to-die” policy. These policies are typically less expensive than conventional life insurance because they insure the lives of two people as opposed to one. A survivorship life policy pays out the death benefit only after both of the insureds have died.

The premiums on survivorship insurance are lower simply because these policies are considered to be lower risk for the insurance company. After all, the risk of two people dying within a specified period of time is much lower than the risk of one person dying—which means the insurance company is less likely to have to pay the benefit.

Like regular life insurance, a survivorship policy can help pay off estate taxes if both of the policy holders die. However, even if your estate is not subject to taxes, the benefit from a survivorship policy can help pay final expenses and probate costs with enough left over to provide income to survivors or make a charitable donation.

Additionally, if you purchase a survivorship policy in an irrevocable life insurance trust, the proceeds will not be included in the taxable estate—which means the benefit will pass to your beneficiaries tax-free.

Is survivorship life right for you?

Like any other insurance policy, whether or not you’ll qualify for survivorship life all comes down to your age and health as well as the type and amount of insurance you want to purchase. (These factors will also determine how much you’ll have to pay for the policy.)

Before you dive into a survivorship life insurance application, you should first confirm that you are in fact insurable. Additionally, because survivorship policies often involve trusts, there may be some complicated tax rules and regulations attached to the policy. Consult with Brian Gruss to determine if a survivorship policy is the best option for you.