1. 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 15 Tools & Techniques of Life Insurance Planning

2. 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 Chapter 15 Tools & Techniques of Life Insurance Planning

3. 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 Chapter 15 Tools & Techniques of Life Insurance Planning

4. 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 Chapter 15 Tools & Techniques of Life Insurance Planning

5. 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 Chapter 15 Tools & Techniques of Life Insurance Planning

6. 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 Chapter 15 Tools & Techniques of Life Insurance Planning

7. 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 Chapter 15 Tools & Techniques of Life Insurance Planning

8. 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 Chapter 15 Tools & Techniques of Life Insurance Planning

9. 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 Chapter 15 Tools & Techniques of Life Insurance Planning