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Survivorship Life Insurance

Survivorship Life Insurance insures two people and pays benefits only after the second person dies.

It is generally designed to provide funds to pay estate taxes. Also called second-to-die life insurance, "joint and last survivor" and "last-do-die" insurance. The proceeds of the policy become available at the second death when estate tax and estate settlement costs may cause an excessive financial burden.

Since estate taxes are based upon the total current value of all assets (liquid or not), Survivorship Life Insurance can protect family estates such as real estate, property, family farms and other hard assets from liquidation. Survivorship Life Insurance is designed to protect larger estates, generally $5 Million or greater.

Survivorship Insurance policy premiums are based upon the risk involved in the insurer having a monetary loss as a result of paying out claims. This risk is based upon statistics. For example, a person with known medical problems (such as high blood pressure) is statistically more likely to suffer death earlier than a healthy person without such a condition. Therefore the insurance companies cost to provide life insurance coverage for the medically impaired person is higher.

Two main benefits come from that

1. Because there is less of a risk involved for the insurer when the death benefit is paid after the death of two people, the cost of the policy (the premium) is less.

2. There is less financial risk for the insurer, so those with medical or other impairments that would normally be rated (or possibly declined) can get approved (depending upon the health of the other applicant).

So, the risk is spread over two lives resulting in lower policy costs and the Survivorship life insurance can be less costly and easier to qualify for than other types of life insurance.

Estate Planning and Survivorship Life Insurance
Survivorship policies are typically designed to offset the monetary costs of estate taxes. Estate taxes can reach levels as high as 55 percent. A bill was enacted in the early 1980's that allowed the postponement of estate taxes until the death of the second spouse so Survivorship life insurance policies are used to offset the financial burden of estate taxes after the death of the final spouse.

A safe last to die policy should be owned by a third party (typically a trustee).

The ultimate goal of estate planning is to acquire and preserve someone's assets past death. Several major decisions must be taken:

Who are the beneficiaries?
How can you reduce or eliminate administration costs?
How can taxes be reduced or eliminated?

There are two major common ways to start the estate planning process. Either the creation of a will or the creation of a trust. Both are designed to determine who is the beneficiary of specific assets. But the similarities end there. For more information of trusts or wills, contact a lawyer or certified accountant.

Taxes Imposed on the Transfer of Assets
At this writing there are three taxes imposed on the assets of the deceased: estate tax, gift tax, and generation skipping transfer tax.

Gift tax is a tax that is imposed during the lifetime of the giver. Unlimited gifts may be given to a spouse or to charity without tax. And gifts of less than $10,000 per year may be given without taxation. The tax rate on gift taxes ranges from 37% to 60%. But an applicable exclusion is satisfied before taxes are required. The applicable exclusion is a specific amount of money depending upon the year. Currently in the year 2000, the excludable amount is approximately $675,000. This amount will rise each year until it reaches $1 million in 2006.

Estate tax is one that is imposed upon death, but in the event of a married couple it is not imposed until the death of both parties. The estate taxes are based upon the total current value of all assets (liquid or not) after all appropriate expenses and appropriate asset transfers.

The Generation-Skipping Transfer Tax is imposed both at death and during the lifetime of an individual. This tax is at 55%. A decedent (the person transferring assets) has a lifetime excludable gift amount of $1,010,000. This tax and exclusion is applied to gifts that are for grandchildren or relatives further down the family tree (i.e.. great grandchildren). Transferring assets to the skip generation that are greater than the allocated amount may also be subjected to an estate tax if the gift is at death.

Types of Policies
Survivorship Life Insurance policies essentially add special beneficiary provisions to the normal types of non-term Life Insurance policies : whole life, variable life, and universal life.

The common link between these three policy types are that they develop a cash value. Policies that develop a cash value are commonly referred to as permanent insurance. permanent policies provide a death benefit as well as an investment component. The investment can be borrowed from or even withdrawn to fund retirement. A number survivorship life insurance plans allow up to a 10 percent withdrawal annually without the policy surrendering itself.

  • Whole Life

    Whole life insurance by definition has a fixed premium (premium never changes) and an accumulating cash value. The cash value is designed to increase to age 100 when it will then equal the death benefit. The cash value is able to be borrowed against and is received even if the policy is cancelled due to non-payment. Whole life policies do not have to be renewed or converted. There are several variations of whole life: limited pay, modified premium, and graded premium. The only major differences are in the way the premium is paid.
  • Variable Life

    Variable Life is an interest-sensitive form of insurance. The goal behind variable life insurance is to create a product that combines the protection of life insurance with the growth potential of common stocks. This type of policy is similar to whole life in that it has fixed premiums. Variable life policies have a minimum guaranteed death benefit, however the actual death benefit will vary based on the market conditions of the investment chosen. Typical variable life investment mediums are stock funds, bond funds, real estate funds, or any combination of these. There is no guarantee to the cash value of the policy because it is based on market growth. As with whole life plans, there are usually provisions that allow the cash value to be borrowed against.

  • Universal Life

    Universal life insurance is the most flexible type available. It's purpose is to be a combination of term insurance protection with the accumulating cash value of whole life. These plans normally increase in value faster than whole life because it's interest rates tend to follow the markets instead. Premiums can be paid in a lump sum, annually, or anywhere in between. There is usually a guaranteed minimum interest rate. The administrative costs of the policy are deducted from the cash value of the policy on a monthly basis. As long as the cash value is substantial enough to keep the policy in force, the policy will not lapse. The death benefit reduces in proportion to the increase in cash value, which creates a level death benefit.

After your life insurance needs are determined and you've chosen the type of permanent insurance for your policy, sitting down with your CPA and/or insurance professional will help to complete the process.

The first step to choosing the right policy is to determine if the policy being considered is offered from a company in good financial standing and that they have the ability to pay their claims. Since Survivorship Life Insurance is a long term instrument, finding a highly rated company with the financial ability to pay claims is essential.

There are several independent companies that rate companies on these factors. We recommend only considering products from companies with the top three ratings from these companies. Here are links to these financial rating companies:

Duff & Phelps
Standard & Poors
A.M. Best
Weiss Research

After determining if the proposed policies are financially secure, it would be wise to reassess your needs. A policy should be designed around the needs of you, your family, and your estate. If the goal of the life insurance policy is for estate preservation, consider consulting with a CPA or lawyer to ensure the policy will accomplish it's goals.


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