The unlimited marital deduction generally exempts the estate of a married couple who leave their assets to each other from federal taxes when the first spouse dies. However, when the surviving spouse dies, the spouse’s assets will be subject to federal taxes at a rate which can be as high as 40%. A problem can arise if there is not enough cash in the estate to pay the taxes.
Payment of a surviving spouse’s estate taxes can be provided for by buying a type of life insurance known as survivorship or second-to-die insurance. In the case of a married couple, benefits from survivorship life insurance are not paid until the surviving spouse dies. The cost of this type of life insurance is considerably less than the cost of conventional life insurance because the insurance company’s risk is based on two lives.
In addition to providing payment of the survivor’s estate taxes, survivorship life insurance offers other advantages. Arrangements can be made to transfer the policy’s ownership to the survivor’s children. This removes the policy proceeds from the surviving spouse’s estate and protects them from estate taxes. Furthermore, it’s often possible to buy survivorship insurance when one spouse can’t get single life coverage because of poor health.