Most people view life insurance as a death benefit for their dependent children or surviving spouse. However, life insurance, specifically second-to-die or survivorship insurance, can also be a very effective asset preservation tool for estates of all sizes.
This 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. The approach respects martial estate tax deductions that defer estate taxes until both insured spouses are deceased. The benefit will not be paid until both individuals on the policy are deceased.
Survivorship life insurance can be very beneficial in several estate transfer circumstances. Here are five scenarios where survivorships might be considered:
Avoiding Taxation Eating Away Retirement Account Assets
Many are surprised to learn that the 401 (k), IRA, or another retirement account they plan 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. 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
Like 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 death. In the meantime, if you name the non-profit organization as the owner and beneficiary of the policy, 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 estate taxes and keep your non-liquid assets intact. The survivorship policy can also be helpful in cases where you have multiple children or grandchildren, some of whom might not be interested in real estate or business ownership. Those interested in the asset(s) can use their portion of the life insurance benefit to buy out the other involved parties.
Gaining Insurance For A Spouse With Poor Health
Your spouse might have been told they are uninsurable due to poor health conditions. A survivorship policy can generally be obtained if the other spouse is in relatively good health.
Caring For Children With Special Needs
Ensuring your child with special needs is cared for after you and your spouse die is daunting. A survivorship policy is one cost-effective way to ensure your special needs child has a significant death benefit to provide for their care once you and your spouse are deceased. Aside from a special needs trust, this is usually done 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, they must be excluded from both. Neither spouse can have ownership rights on the policy. You may choose to assign the rights of the approach to an adult child, set up a trust, or such. It’s best to consult your estate lawyer to ensure the structure matches your estate planning needs and goals.