Most people view Life insurance as merely a death benefit for their dependent children or surviving spouse. However, Life insurance, specifically a type called Second-To-Die or Survivorship insurance, can additionally be a very effective asset preservation tool for estates of all sizes.
This type of Life insurance covers two individuals (most often spouses) through a single Life insurance policy. The premium for Survivorship insurance is usually much less expensive than other Individual Life insurance policy options and the policy respects martial estate tax deductions that defer estate taxes until both insured spouses are deceased. The benefit will not be paid out until both individuals on the policy are deceased.
Survivorship Life insurance can be very beneficial in a number of estate transfer circumstances. Here are five scenarios where survivorships might be considered:
Avoiding Taxation Eating Away at Retirement Account Assets. Many are surprised to learn that the 401 (k), IRA, or other retirement account that they’re planning on leaving to their children, grandchildren, or other loved ones can be cut in half by the time all the applicable taxes are applied to the money. In order to avoid tapping into this money to pay these taxes, you may buy a survivorship policy equal to the estimated taxes on your retirement account assets. This way the survivorship policy negates the tax burden.
Ensuring Charitable Contributions Are Dollar-For-Dollar. Just as with retirement accounts, you may use a survivorship policy to ensure that your charitable donations to qualified non-profit organizations are received dollar-for-dollar upon your death. In the meantime, if you name the non-profit organization as the owner and beneficiary of the policy, then you’ll be able to deduct the survivorship policy premiums from your annual taxes.
Keeping Non-Liquid Assets Intact. You might have assets that aren’t liquid, such as a family business or real estate, and that your beneficiaries don’t want to sell to pay the estate taxes. The benefit from a survivorship policy can be used to pay the estate taxes and keep your non-liquid assets intact. The survivorship policy can also be useful in cases where you have multiple children or grandchildren, some of whom might not be interested in ownership of the involved real estate or business. Those interested in the asset(s) can use their portion of the Life insurance benefit to buyout the other involved parties.
Gaining Insurance for a Spouse with Poor Health. Your spouse might have been told he/she is uninsurable due to a poor health condition. A survivorship policy can generally be obtained so long as the other spouse is in relatively good health.
Caring for Children with Special Needs. Ensuring that your child with special needs is cared for after you and your spouse die is a daunting process to say the least. A survivorship policy is one cost-effective way that you can ensure your special needs child has a large death benefit to provide for their care once you and your spouse are deceased. This is usually done aside a special needs trust to ensure that the funds are properly managed and to retain the child’s ability to receive government funds like SSI.
In closing, for the survivorship policy to have the desired impact, it must be excluded from the estate of the insured parties. If you and your spouse have separate estates, then it must be excluded from both. Neither spouse can have ownership rights on the policy. You might choose to assign the rights of the policy to an adult child, setup a trust, or such. It’s best to consult with your estate lawyer to ensure the structure is congruent with your estate planning needs and goals.