“Who should we insure?” It’s a common question we hear when we’re helping a couple create an estate plan. After all, just insuring the older of the two spouses isn’t a guaranteed way to provide for heirs. But rather than deciding who to insure, we can make it possible to prepare for any scenario simply by using a common provision in life insurance — joint last survivor life insurance. This provision can be valuable for couples planning for their heirs because combined spousal estates can far exceed the allowable estate tax exemption, especially when these estates have highly appreciating assets like property.
What Is Joint Life Insurance, and How Is it Different Than Joint Last Survivor Life Insurance?
There are two types of joint life insurance. The first is joint life insurance with a first-to-die provision, which pays out benefits on the death of the first spouse. The second is second-to-die, or last survivor, life insurance, which pays out death benefits when the second spouse on the policy dies. Both are considered joint policies because the premium is determined by averaging the life expectancies of both individuals.
A joint life insurance policy can be valuable when you’re dealing with a healthier younger spouse who may be married to someone older or with a chronic medical condition. The policyholders are able to leverage the good health of one spouse to get a better joint rate for the two of them than if they’d bought two individual policies separately. If one individual is uninsurable alone, a joint policy could help him or her gain the needed insurance by leveraging a spouse’s good health. In cases like this, a joint policy that pays out after the death of the second spouse is particularly valuable. This type of policy is designed to protect your heirs, especially if your spousal estate exceeds the total combined estate tax exemption of $22.4 million.
Joint policies are available on just about every type of permanent or term insurance, but these last survivor provisions are most popular under universal life (UL) insurance policies that offer high death benefits relative to the premium and offer the most flexibility in terms of both premium payments and duration of coverage.
Leveraging Joint Last Survivor Life Insurance in Estate Planning
When the first spouse in a marriage passes away, he or she often passes on the estate to his or her significant other. But that’s not the only thing you can pass on. That first spouse can also pass on an estate tax exemption of $11,200,000. Then, when the second spouse dies, the couple’s heirs can use both spouses’ exemptions to reduce the total taxable estate. That means the heirs get to take a total exemption for the estate of $22,400,000.
But here’s where it gets tricky. If the first spouse passes on his or her entire estate, there is a chance that estate is going to grow exponentially through the rest of the second spouse’s life. This is especially true if that estate has a lot of highly appreciating assets, like property or business assets. If those assets grow significantly in value, then when that second spouse passes away, the heirs may have to liquidate certain assets to pay the tax bill.
This is where joint life insurance comes in. The best policy for this is usually a UL policy because of its lower cost and programmability. In a UL policy, you can adjust the premiums that you pay, change the duration of coverage based on life expectancy, and use the policy to efficiently cover estate expenses. When this policy is properly held in a trust, it stays outside of your estate. So when it comes time for estate taxes to be paid, the value of the policy can be used to pay those estate taxes by your chosen heirs. This is a good way to avoid having to liquidate high-value assets, like property or business interests, as well as providing some additional funding for heirs.
When Joint Last Survivor Life Insurance Isn’t Advisable
While joint last survivor life insurance is usually advisable for married couples, it’s not advisable in every circumstance. For example, if your joint policy is held in an irrevocable trust and you get divorced, it can get a little tricky to unwind since you would need to get one spouse off the policy, and you no longer have any control over the policy. In addition, if there is an extremely large gap in the ages between the spouses, the second spouse might pay much more for his or her half of the joint policy than you might think.
But for the most part, when we’re dealing with a married couple, these joint policies are the best way to get the most coverage while getting a break on premium payments. Deciding what type of policy is best for you is something a Howard Kaye advisor can help you with. Call us today at 800-DIE-RICH.