Estate planning involves preparing for the transfer of assets upon death to loved ones and managing tax liabilities. Survivorship life insurance, also known as second-to-die insurance, can be a useful part of an estate plan. Here’s a look at what survivorship life insurance is and how it can support estate planning goals.
What Is Survivorship Life Insurance?
Survivorship life insurance, or last-to-die insurance, is a policy that covers two people (often spouses or domestic partners) and pays out a death benefit when the second insured person passes away. Premiums tend to be lower compared to individual life insurance since the policy has to pay out only once over a longer time frame compared to two separate policies.
The death benefit from the survivorship policy can provide funds to help cover taxes, debts, funeral costs, and the transfer of wealth to heirs. The primary goal is to create liquidity for estate expenses when the second partner dies without having to sell other assets in the estate itself, like real estate holdings or an operating business.
How Survivorship Insurance Supports Estate Goals
Let’s now explore how are survivorship life insurance policies helpful in estate planning. Here are few such instances where it can be helpful.
Minimizing Estate Taxes
Estate taxes can claim 40% or more of an estate’s value beyond a certain exemption level. Most states also assess taxes on inherited assets. Estate planning techniques aim to shelter assets from taxes, so more wealth transfers to beneficiaries rather than the government.
Survivorship policies provide tax-free income to beneficiaries that is not part of the taxable estate. This helps surviving family retain more of the estate’s overall value. The death benefit can also provide funds to pay estate taxes without liquidating other assets if taxes are owed even after maximizing credits and exemptions.
Protecting a Family Business
Many family businesses do not succeed in the second generation due to a lack of succession planning and liquidity at the passing of the founder. Heirs often struggle to maintain ownership of a family company while also paying taxes and any debts owed by the deceased.
A survivorship policy creates an influx of cash upon the death of the business owner. This gives heirs the funds needed to cover liabilities without having to sell or leverage the business itself to raise money quickly. It helps the company transition ownership smoothly to family successors.
Replacing Wealth for Heirs
An estate’s true value includes expected future earnings and income streams. Yet when a breadwinner dies, heirs lose out on many years of future wages that would have grown the estate. Life insurance helps offset this loss of wealth to ensure the standard of living continues for surviving family.
From this perspective, a last-to-die policy funds the support the deceased spouse would have continued providing. The death benefit passes wealth to heirs they can invest to replicate the income lost from the passing of the patriarch or matriarch breadwinner in the family.
Funding Special Needs Trusts
Special needs trusts support beneficiaries who have chronic disabilities or special requirements. A survivorship policy can fund such a trust to provide specialized care long after parents or primary caretakers pass away. The trust offers financial support while allowing disabled beneficiaries to maintain eligibility for needs-based government benefits.
The death benefit from a last-to-die policy helps ensure the person continues receiving top-quality services tailored to their unique requirements throughout adulthood. Trust distributions provide for medical care, housing, transportation, and living expenses they may not otherwise afford on their own.
Key Considerations for Survivorship Insurance in Estate Planning
When exploring survivorship insurance for estate planning, keep the following considerations in mind:
- Age and health
Insurers offer lower premiums for younger applicants in better health, maximizing the death benefit you can secure. Shop policies well before advanced age or declining health limit options.
- Cash value option
Some policies allow cash value to accumulate on a tax-advantaged basis. This can supplement retirement income in later years if not needed for estate expenses yet offers lower death benefits.
- Duration
Survivorship policy terms often range from 10 to 40 years. Select durations aligned with the timeline expected to meet estate planning goals like wealth replacement for heirs or business succession funding needs after the passage of the second insured.
- Changing needs
Review policies periodically to ensure the death benefit aligns with evolving tax laws, estate value growth projections, and heir circumstances over the long term.
Survivorship life insurance removes the burden from heirs of funding estate taxes and debts while ensuring assets successfully transfer according to your succession wishes. Last-to-die policies provide liquidity and support to ease transitions upon the death of the surviving insured for long-term estate planning protection across generations. You need to work with a law firm that you can trust to ensure that you get all benefits.