Survivorship Life Insurance

Survivorship life insurance is a product used mostly for estate tax planning purposes. Where estates are large but illiquid, this financial tool can be effective for raising necessary funds to conserve the estate from taxation. Many attorneys and CPA’s recommend this type product for the estate tax purpose and usually recommend that it be placed into an irrevocable life insurance trust. Survivorship life generally works best for ages 65 and over.

However, for ages 65 and over, survivorship life insurance may have some serious consequences for the insured and their heirs that sometimes get overlooked. One such risk is whereby one spouse lives to or beyond life expectancy. Since the policy doesn’t pay until the second of the spouses to die, such a long time frame may reduce the advantage of the death benefit as an effective way to pay the estate tax.

A more serious consequence may occur when one spouse dies at an early age (example age 50) and the other spouse lives to an old age (example age 90). The loss of not paying a death benefit on the first spouse’s death has a large lost opportunity cost to the eventual heirs. In either of the two cases just mentioned, a significant portion of the estate assets may be lost for the heirs. These losses occur because the future value of the premium payments and/or death benefits not paid out at the first death may be equal to or greater than the value of the death benefit. These costs should always be explained to and clearly calculated by consumers before considering survivorship life insurance as an estate planning strategy.

The LEAP process offers consumers many choices in the selection of a well-designed estate plan. We seek to build a strategy that will work under many scenarios, and not just a few. Only a fair and balanced analysis can provide an appraisal to select the most appropriate estate-planning tool.

The information provided is not written or intended as specific tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. MassMutual, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.


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