Wednesday, June 17, 2009

Survivorship or “Second-to-die” Insurance

Most of us do not need to worry about planning for the federal estate tax. With the current exemption amount at $3.5M, a married couple can pass along $7M to their children without paying any federal estate tax.

What if you are one of the fortunate few who do need to plan for the federal estate tax? Also, what if in addition to having a large estate your estate contained illiquid assets, like real estate and/or a family business? One possibility is an irrevocable life insurance trust (ILIT). The idea is that you fund the trust with a life insurance policy and the proceeds can be used by your children to pay estate taxes.

This is where survivorship insurance, also referred to as second-to-die insurance, comes into play. Since there is typically no estate tax on the first estate due to the marital deduction, you are looking for the policy to pay after both spouses have died. The second-to-die policy pays the death benefit after the second person dies. Because this insurance covers two lives, it is cheaper than a single life policy.

In most instances, a second-to-die policy is used to fund an ILIT.


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