Versatile planning strategy

Survivorship life insurance was designed to do one job very well – namely, provide liquid funds to pay estate taxes upon the death of the second spouse. This was a valuable benefit for many modestly wealth couples until January 1, 2010, when Congress greatly increased the applicable exclusion amount. For 2017, estates up to $5,490.000 per person, and $10,980,000 for a married couple (2020, estates up to $11.58 million for individuals and over $23 million for married couples) can avoid federal estate tax.

However, you have an opportunity to change this thinking. Survivorship life insurance is a versatile planning strategy with many uses beyond estate taxes. It is often the most affordable way for a couple to acquire permanent life insurance with confidence that the death benefit will be paid at the second death, regardless of how long they live, as long as the required premiums are paid. Affordable premiums also help to increase cash value, which a couple can use for diverse lifetime planning needs.

To expand your thinking about when and how to suggest survivorship life insurance to your clients, here are a few proven applications to keep in mind.

Estate replacement

Making lifetime gifts to charity can be personally rewarding, help worthwhile causes, and generate income tax benefits. But such gifts can also create family friction by disinheriting family members. This strategy uses survivorship life insurance to replace the value of assets given to charity. Heirs do not feel their inheritances are threatened because the policy’s death benefit, payable on the second death, at least equals the charitable gift, and the estate remains intact.

Estate equalization

An estate equalization strategy can be appropriate when a couple wishes to leave property – e.g., a business or real estate – to one family member while making sure other heirs receive equal value. Survivorship life insurance can help to fill gaps between a couple’s liquid assets and the cash they will need to equalize estates at the second death. In some policies, the death benefit can be adjusted to account for changing value of the property over time.

Special-needs trust funding

A couple with a special-needs child or grandchild may be most concerned about how support will be provided after both are gone. The answer is to set up a special-needs trust in which discretionary powers are given to a trustee to make distributions to a special-needs beneficiary that doesn’t jeopardize qualification for government benefits. Funded with survivorship life insurance, the trust will have enough assets for the trust to fulfill its purpose on the second death.

Social Security maximization

Social Security benefits can begin as soon as age 62. But the maximum benefit is claimed by delaying the start of benefit payments to age 70 for a worker, or to normal retirement age (currently 66) for a non-working spouse. The cash value of a permanent survivorship life insurance policy can be used to fill retirement income gaps while Social Security benefits are delayed. This strategy also has income tax advantages because up to 85 percent of Social Security benefits can be taxable, while withdrawals up to basis and loans against life insurance cash value are generally a non-taxable event.

Erasing retirement plan income tax liabilities

For couples with a large part of their net worth tied up in 401(k)s or IRAs, one concern is the income tax liability they will leave to beneficiaries. Non-spouse beneficiaries are subject to minimum distribution requirements, which usually begin shortly after the account owner’s death, and most distributions are taxable to them as ordinary income. One strategy is to gradually distribute retirement plan money and pay tax on it during the owner’s life, then replace this value with survivorship life insurance. Another option is to transfer the money to a Roth IRA, from which heirs can take non-taxable distributions, in most cases. The amount of income tax paid on the Roth transfer (conversion) can be replaced with survivorship life. Clients should consult with their tax advisors first on this strategy to determine any tax consequences prior to proceeding.

Addressing market uncertainty

Some couples have planned their estates and bequests based on projected rates of return on investments. However, as they grow older, they may fall short of those rates or grow anxious over market volatility. Downshifting to less risky assets may be warranted, but will leave a hole in the projected estate/bequest. Survivorship life insurance can help fill this hole with a predetermined death benefit.  

Planning for non-traditional couples

Survivorship life was designed for couples, and there has been one important trend that has expanded the market in recent years – namely, the growth of non-traditional couples. Whether these couples are legally married or not, they may face family resistance in writing wills and passing assets to partners or heirs. Survivorship life insurance is a private way to pass assets to heirs, upon the second death, without increasing family stress.