15 - 1 survivorship life characteristics also called second-to-die, last-to-die, joint life pays...

15 - 1

Survivorship Life

Characteristics Also called second-to-die, last-to-die, joint life

Pays a death benefit upon the death of two or more insured’s dies

Basic policy is generally a traditional whole life, current assumption whole life or universal life When is the use of this tools indicated

To provide estate liquidity at the second death of a married couple

To protect two carrier families

To provide key person business insurance

In split dollar plans

To help fund charitable bequests

Chapter 15Tools & Techniques of Life

Insurance Planning

15 - 2

Survivorship Life

Advantages Proceeds are payable when needed

If used in conjunction with the unlimited marital deduction

Premiums are lower than for equivalent coverage's in two separate policies

Number of alternative term/permanent life combinations Provide a wide latitude and flexibility in premium payment and death benefit

combinations

A lower “economic benefit” is reportable in split dollar plans

Medical underwriting standards are often eased

Disadvantages No benefits at the first death, if needed, without additional of a special rider In term/permanent plans, premiums could escalate if projected dividends are lower

than projected and/or term rates increase


Insurance Planning

15 - 3

Survivorship Life

Disadvantages No benefits at the first death, if needed, without additional of a special rider

In term/permanent plans, premiums could escalate if projected dividends are lower than projected and/or term rates increase

Tax Implications General tax rules

Death benefits income tax free Death benefits subject to same income, estate, gift and generation skipping transfer

taxation rules as all other types of life insurance

Taxation of living proceeds Governed by IRC section 72 Payments separated into 3 categories

Annuity payments Payments of interest only Amounts not received as an annuity


Insurance Planning

15 - 4

Survivorship Life

Tax Implications (cont'd) Annuity payments

Periodic payments received in a systematic liquidation of cash value

Each payment is treated partially as recovery of investment and partially as taxable interest

Once entire investment has been recovered, any further payments are treated entirely as taxable income

Payments of interest only Taxable income whether distributed or credited to account


Insurance Planning

15 - 5

Survivorship Life

Tax Implications (cont'd) Amounts not received as an annuity

Taxed under the “cost recovery rule”

Included in gross income only to the extent they exceed the investment in the contract

Exceptions Modified Endowment Contracts

Cash distributions taxed under the interest first rule

Loan Proceeds If a loan is outstanding when a policy is surrendered, gains in the contract are

immediately recognized


Insurance Planning

15 - 6

Survivorship Life

Tax Implications (cont'd) Split Dollar Plans

Economic benefit based on the joint and survivor rates based on U.S. Table 38

Significantly lower than for a single life

After the first death, the single life rates apply with respect to the survivor

Estate taxation Treated in the same manner as other types of life insurance

There may or may not be estate tax consequences at the first death, depending on who owns the policy


Insurance Planning

15 - 7

Survivorship Life

Tax Implications (cont'd) Estate taxation (cont'd)

Policy may be owned in three ways By a third party

Exclusively by one or the other insured

Jointly by both insured

If neither insured has incidents of ownership and they have not transferred the policy within 3 years of death

Not included in the gross estate of either insured

Estate inclusion when policy owned by a corporation Policy included in estate of controlling shareholder if corporation has complete control

over policy or at least to borrow against policy


Insurance Planning

15 - 8

Survivorship Life

Tax Implications (cont'd) Gift taxation

Parents may make tax-free joint gifts of up to $24,000 per beneficiary (2008) to help pay premium costs (if insured’s have no incidents of ownership in policy)

If annual gifts in excess of the annual gift tax exclusion amount are necessary, part of the unified gift and estate tax credit could be used so that gift taxes would not have to be paid

Making gifts to multiple beneficiaries can leverage amount qualifying for the annual gift tax exclusion

Alternatives Survivorship life is a unique life insurance policy

Only insurance alternative is to insure each life separately


Insurance Planning

15 - 9

Survivorship Life

Alternatives Principal alternatives to pay estate taxes

Sell estate assets

Borrow money

Have cash readily available

Selecting the best policy Composition of the base policy

Traditional whole life

Current assumption whole life

Universal life


Insurance Planning

15 - 1 survivorship life characteristics also called second-to-die, last-to-die, joint life pays...

Documents