Don’t wait until it’s too late to plan your estate. A second to die life insurance policy on your parents can help avoid the The Death Tax Penalty and pass more of their wealth down to you.
Second to die life insurance also known as Joint Life Insurance or Survivorship Life, insures 2 lives and pays insurance proceeds to your heirs after the death of the last surviving spouse. Most of the time Second to Die Life Insurance is purchased by married couples that may have large estate tax problems.
A simple rule of thumb is that if a couple’s estate is worth more than $10 million or more, it makes sense to purchase Second to Die Life Insurance policy on your parents.
How To Buy Second to Die Life Insurance On Your Parents.
One of the biggest benefits of a second to die policy is that it creates immediate cash to pay off estate taxes due at the second death. The IRS will want its “fair share” of the estate within 9 months of the last survivor’s death – in cash.
The policy creates liquidity to pay off taxes due, administration charges, probate fees etc. so hard assets such as real estate, land or investments do not have to sold in a hurry.
When you’re looking for second to die life insurance quote, it’s important to purchase a plan that is large enough to cover all or most of the estate taxes that are due. If the value of your parent’s estate is $20 million dollars, the IRS will want almost 50% of the estate in cash.
This does not include state estate taxes of about 10% to 20%, administration costs and other fees. In this scenario if your parents were to die today, a 2nd to die policy would be purchased for about $10 million dollars on their lives. This obviously does not include the “time value of money” and your parents living for another 20 years where their estate could grow larger. So, the future net worth of the estate needs to be figured in to find the right amount of insurance coverage.
How to Design A 2nd To Die Policy
Who Is The Insured?
When designing a policy, in most scenarios, the husband and wife will be the insured. They will both need to take an insurance medical exam so a good health history will be very important to get an affordable rate.
Who Is The Owner Of The Policy?
The policy owner will be a trust – an Irrevocable Life Insurance Trust (ILIT). The trust must be formed by an attorney – preferably an estate planning attorney. The trust will have its own tax id number and should be titled like this: “The Jed Smith and Joanne Smith Irrevocable Life Insurance Trust dated December 25, 2016, Jethro Smith and Elly Mae Smith, trustees.”
The reason for an Irrevocable trust is so the assets donated to the trust cannot be given back. Therefore, the assets – insurance will not be included in the estate. If the couple has any “incidences of ownership” in the policy, the assets will be included in the estate.
Who Is The Payor Of The Policy?
Typically, the life insurance premiums are paid by the parents in the form of annual gifts (up to $14,000 per person – 2016) to the Irrevocable Life Insurance Trust. The “gifts” are normally paid to the trustee(s) who then pay the trust for the annual insurance premium. It is not unusual for the children to be trustees of the trust but it could be a bank, an attorney or another custodian.
What Type Of Second to Die Policy Should I Buy On My Parents?
This is not the place to buy term insurance. Term is temporary coverage and if your parents live beyond the term, the policy could expire and the trust will become unfunded. Permanent insurance is almost always recommended for estate planning.
Types of Permanent Life Insurance Coverage
A permanent life insurance policy will not only cover your parents with death benefit protection, it will last also last a lifetime or as long your parents pay the premiums. This is essential in providing coverage for the trust to be able to pay the taxes.
There are several different types of permanent policies that are appropriate for trust or estate planning: Whole life insurance, Universal life insurance (UL) and Guaranteed Universal Life Insurance (GUL). Many life insurance companies design their permanent policies to match the needs of estate planning.
Whole Life Insurance – This is the most basic form of permanent life insurance. The policy covers the insured with a guaranteed amount of death benefit for life if the premiums are paid.
The premiums are guaranteed not to increase regardless of the insured’s age. There is a cash value or investment component that grows over time which could help pay future premiums if the value is significant.
Whole life is probably the most expensive option for funding a trust but some policies such as those from Guardian Life, Mass Mutual and some Metlife policies perform so well that premiums could be discontinued in 20 or 25 years.
Universal Life Insurance – Universal life is a form of permanent life insurance coverage whereas it has a death benefit and a cash value component but the premium structure is more flexible. The policyholder can within certain guidelines, modify the premium payments. The policyholder can also how much of their premium goes to cash value and how much goes towards the death benefit.
This feature makes the policy more affordable but is also dangerous in an estate planning situation because if the premium is not funded properly or paid regularly, the policy could lapse.
Guaranteed Universal Life or sometimes called, Survivorship GUL is designed specifically for estate planning purposes. The policy is a combination of permanent insurance and term insurance which makes the premiums more affordable. Unlike whole life and Universal Life insurance, GUL does not build cash value but the premiums are guaranteed level and will never go up.
Typical GUL policies are purchased by people who have an estate planning need now in the present or sometime in the future so the policy can be guaranteed to age 100, 110 or even to age 121.
Where Can I Get Quotes For A Second To Die Policy?
If you are searching the Internet looking for quotes, you will probably find most insurance websites are not equipped to provide you with second to die life insurance quotes. That is because, this type of policy is not just purchased by lowest price which many insurance quoting sites tend to show people. Second to die life insurance is part of estate planning and can be somewhat involved and complicated. A policy should be bought or structured to fit the estate planning needs of your parents and not purchase by cheapest price.