How Survivorship Life Insurance Policies Are Helpful in Estate Planning
How are survivorship life insurance policies helpful in estate planning… Estate planning often focuses on efficiently transferring wealth to future generations. Minimizing taxes and ensuring loved ones’ financial security are key goals. Survivorship life insurance, also called second-to-die life insurance, is a valuable tool for this process.
In this post, we’ll explore how survivorship life insurance can enhance estate planning and provide key benefits, along with what to consider when adding it to your plan.
What Is Survivorship Life Insurance?
Survivorship life insurance covers two people, typically a married couple, under one policy. The death benefit only gets paid out after both policyholders die. This structure differs from individual policies, making it useful for specific estate planning goals.
1. Covering Estate Taxes
Many people choose survivorship life insurance to cover estate taxes. Estates exceeding the federal estate tax exemption (currently $12.92 million per person in 2023) can face heavy tax bills. Some heirs may even need to sell valuable assets, such as family homes or businesses, to pay these taxes.
Survivorship life insurance provides the necessary liquidity to cover these taxes, preventing heirs from selling important assets. Since the benefit is paid after both spouses pass, it aligns well with estate settlement timing.
2. Wealth Transfer to Heirs
Survivorship policies are an efficient way to transfer wealth to future generations. The death benefit provides a lump sum to beneficiaries, securing their financial future and easing the burden of estate-related costs.
Additionally, life insurance payouts are generally tax-free, which maximizes the value of the inheritance left to beneficiaries.
3. Funding a Trust
Many estate plans involve creating a trust, especially when there are minors or concerns about how heirs will manage their inheritance. Survivorship life insurance can fund a life insurance trust, providing steady income to beneficiaries as per the policyholders’ wishes.
Placing the policy in an irrevocable life insurance trust (ILIT) excludes it from the estate, reducing tax liabilities even further.
4. Lower Premiums Compared to Individual Policies
Survivorship life insurance is often more cost-effective than buying two separate policies. Since the payout occurs after the second death, insurers consider it less risky. This allows for lower premiums, making it a practical choice for couples looking to maximize coverage while keeping costs down.
5. Special Needs Planning
Survivorship life insurance can support special needs planning by providing long-term resources for a dependent’s care. After both parents pass, the policy ensures financial stability. Pairing this with a special needs trust ensures your dependent’s financial future remains secure without affecting their eligibility for government benefits.
6. Business Succession Planning
Survivorship life insurance can also assist with business succession. Upon both spouses’ death, the policy payout can provide the necessary funds to transfer the family business to the next generation. It helps cover transition costs and ensures the business remains operational without forcing a sale to cover estate taxes.
