Survivorship life insurance
by Kate BavelockIf you haven’t looked at your life insurance in a few years, do so now to find new ways it can work for you.
“Most people avoid considering life insurance. It’s not something you want to think about. I wish it were named ‘family protection policies.’ Then people would be more receptive to thinking about it,” said Anthony Cantore, a New York Life representative based in Hyannis.
According to Cantore, many people think the life insurance offered through their job is enough, but often it is only the minimum and doesn’t protect their assets and their family. Only a thorough analysis by an insurance agent will show what is needed and the smartest way to access it.
One of the policies that may be underutilized is survivorship life insurance. It protects your net worth by reducing your estate taxes. This type of policy should be especially attractive to two kinds of Cape Codders: retirees and those involved in closely held or family-owned businesses.
What is survivorship life insurance?
Survivorship life insurance, sometimes known as second-to-die insurance, insures both spouses under one policy, with the proceeds payable on the second death.
Under one arrangement, you can establish an irrevocable life insurance trust to purchase the policy with your heirs as beneficiaries. The surviving spouse can be willed the assets at the death of the first spouse. At the second spouse’s death, the insurance proceeds go to the beneficiaries, in effect replacing assets lost to taxes.
Since two lives are insured, premiums are usually lower than two separate policies and it is easier and cheaper to insure a spouse with less than perfect health if the other spouse is healthy.
Estate tax benefits. According to David Robinson of Rogers & Gray Insurance, “Survivorship life insurance is often used as an estate planning tool to counter the estate tax liability that many Cape Cod families will face. When it comes to small business owners on the Cape, the need is even stronger to plan for estate taxes. One of the most common reasons why businesses do not successfully perpetuate to the next generation is due to a lack of planning. The majority of these businesses are sold to cover this large estate tax liability that families face.”
Robinson pointed out that high property values on the Cape can be an estate tax liability.
Sean McCloskey, CLU, also of Rogers & Gray in Hyannis, added, “Estate taxes can take 48 percent or 49 percent of an individual’s wealth and pay it to the government. Don’t forget that the individual has already paid taxes on it, so in effect it is a double taxation.
“There is a lot of focus on this issue on the Cape because of appreciation of real estate. Suddenly, people find themselves with a high net worth and are looking at estate tax liabilities. Many have inherited property from their own parents and are looking at how it will be passed down,” said McCloskey.
Better premiums for couples. Besides the estate tax benefits, survivorship life insurance should be considered for its ability to lower payments and provide coverage to a spouse with health problems at a lower rate than an individual policy could, especially if the other spouse is healthy.
Benefits for family-owned business. Estate taxes at the death of the business owner are why the large majority of family-owned businesses are not passed down to the second generation. Survivorship life insurance provides a cash payout to buy out an heir who does not want to be an owner in the business by an heir who wishes to continue to run the business.
“Business owners are so wrapped up in keeping the business afloat and running, they don’t always take the time to plan. Sometimes they will sit with an estate-planning attorney who may help reduce their estate tax liability. But often they don’t think of insurance as the way to provide cash equity for their survivors to buy out the business,” said McCloskey.
Business owners have to plan for their death. “Equal is not always fair. If one child stayed and worked in the business, is it fair at the owner’s death for both to inherit equally? Is it fair for the child who left to inherit a business they didn’t want? Insurance can be used to equalize the estate where one can inherit the business and one can inherit a cash payment and there is no need to liquidate the business,” McCloskey explained.
“The last thing you want to do is sell off the business or part of the business to pay estate taxes,” he emphasized.
On the Cape, businesses that could benefit from such a plan include restaurants, construction firms and service businesses.
Is it right for you?
Each family has different insurance needs depending on their assets and family situation. For example, survivorship life insurance can be a valuable tool to provide guaranteed funding for a trust to provide for a child with special needs.
It is not a good tool if there is no need for cash liquidity at death or for a couple who is not in an estate-tax situation, said McCloskey.
The most important advice, according to all the experts, is talk to an insurance adviser, and review your plan often, as tax laws and policies change. For example, in 2001 mortality tables were revised for the first time since 1980 to reflect new data on life expectancy and disease survivability. For many people this translated into lower premiums, but not if the appropriate policy revisions were left undone.
“Because of evolution of insurance products, it’s oftentimes prudent to sit down and review your plan with an insurance adviser. People are living longer, so mortality rates are more favorable. Maybe you have a variable survivorship plan based on market management that isn’t performing to expectation. Tax laws change. So it’s a good idea to review your plan,” advised McCloskey.
Originally published in the Sep/Oct 2006 issue of Cape Business.
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