Many parents want to leave their children a large inheritance to help provide for them and their families, but such a bequest can be a double-edged sword. Along with all that accumulated wealth comes the problem of having to pay substantial estate taxes. If heirs are forced to pay these taxes from the estate proceeds, it will significantly lower the amount of the inheritance they ultimately receive.

You can help your heirs avoid this situation by purchasing a second-to-die life insurance policy on you and your spouse. Such a policy, also referred to as survivorship life, can provide tax-free dollars (if owned outside of the estate) to pay estate taxes.

Federal tax law permits you to leave an unlimited amount of assets to your surviving spouse without taxation. Those assets then become part of your spouse’s estate and are taxed when he or she dies. If you purchase a second-to-die life insurance policy insuring both you and your spouse, and you die first, the death benefit is paid to your beneficiaries upon your spouse’s death, thus providing the necessary funds to pay whatever estate taxes are owed.

Consider these additional advantages to buying a second-to-die policy:

· Survivorship life costs less than a single insured life insurance policy. The premium you pay for a second-to-die policy is calculated using the joint life expectancy of you and your spouse. Since the insurance company owes nothing until both of you die, the premium will be less.

· Qualifying for this type of insurance is much easier than for single insured life insurance. Since the death benefit isn’t paid until both insureds die, the insurance company isn’t as concerned if one of you is in poor health. Some insurers will even issue a policy when one of the insureds is deemed uninsurable by typical life insurance standards.

· Survivorship life can add value to your estate. Second-to-die life insurance does more than protect your estate from taxes. The death benefit can ensure your beneficiaries receive a minimum amount of money, even if you spend through all your other assets during your lifetime.

· The proceeds from a second-to-die policy can cover additional tax obligations. The estate might owe other taxes. For example, income taxes might be owed on any traditional individual retirement accounts (IRAs) and tax-deferred plans that the deceased owned.

Consult with a financial professional to determine if second-to-die life insurance should be a part of your estate planning.

Return To Index