What Is Survivorship Life Insurance and How Is It Helpful in Estate Planning?

What is Survivorship Life Insurance and How is it Helpful in Estate Planning
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Too often, people work hard for a lifetime, and then their children must sell off large assets to pay the estate taxes when the surviving parent dies. If you do not already use survivorship life insurance as part of your estate plan, you might want to rethink that decision. 

Survivorship life insurance can protect the value of your estate and provide financial security for your children. Also, this type of insurance could benefit multiple generations of your descendants.

How Survivorship Life Insurance Is Different From Standard Life Insurance

In a typical life insurance policy, one person owns the policy, one person pays the premiums, and one or more people receive the policy proceeds when the person whose life is insured dies.

The owner, premium payer, insured person, and beneficiary could all be the same person. When that happens, the proceeds of the policy get paid to the estate of the beneficiary.

Survivorship life insurance also gets called “joint survivor life insurance” or “second-to-die life insurance.” The insurance company does not pay out the policy proceeds until both people pass away. Typically, the children of the original couple receive the proceeds.

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Why You Might Want to Consider Survivorship Life Insurance as Part of Your Estate Plan

If you and your spouse want to prevent your estate from getting chopped up to divide large assets among multiple beneficiaries, you might want to buy a survivor policy. If you and your spouse must liquidate an ongoing business, you may want a survivor policy for this reason, too.

Current tax law allows many married couples to defer the payment of federal estate tax until the second spouse dies. The purpose of that rule is to protect surviving spouses from having to sell their assets to pay the estate taxes. The rule shelters surviving spouses by shifting the tax burden to the assets the children will receive.

Joint survivor life insurance can provide these benefits:

  • Because the premiums are often much lower than buying two policies, particularly universal or whole life policies, you will get a superior return on your investment.
  • People whose estates are subject to federal estate tax can use the death benefit to pay those taxes and leave their assets undisturbed to pass to their children. Life insurance can pay out the proceeds quickly for ready cash to cover the tax obligations.
  • Even people who have health problems can often qualify for survivorship life insurance when they might not qualify for standard life insurance. 
  • If you have a large asset, like a family business, that you want to leave to one child, you could use a survivor policy to provide an asset of similar value to your other child to assure fair distribution and avoid having to liquidate the company.

There might be additional advantages to incorporating a survivorship life insurance policy in your estate planning.

Florida Does Not Have State Inheritance or Estate Taxes

According to the Florida Department of Revenue, Florida abolished state estate taxes effective January 1, 2005. For everyone who died on or after January 1, 2005, there is federal estate tax but no state estate tax. 

According to the Internal Revenue Service (IRS), the federal estate tax applies to the portion of an estate that exceeds $11,700,000 for decedents dying in 2021 and $12,060,000 for people who die in 2022.

Florida does not have an inheritance tax. Inheritance tax charges the heirs and beneficiaries for the assets they received. Estate tax gets charged directly to the estate before it distributes anything to the heirs and beneficiaries. 

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Survivorship Life Insurance Is Affordable

Survivorship life insurance provides many benefits for people with large estates, but people with more modest means could build an estate using this type of insurance product. Let’s say that you and your spouse make enough money to maintain your current lifestyle but have not amassed great wealth.

Because of the lower premiums, you and your spouse could use survivorship life insurance to ensure that you can provide a generous inheritance for your children. Usually, second-to-die life insurance policies are far less expensive than buying policies on both spouses. 

Also, with the passage of time and windfalls like inheriting from others, your estate could grow and become subject to federal estate taxes. 

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Survivorship Life Insurance Could Fund a Dynasty Trust

You might prefer to make your dynasty trust the beneficiary of your survivorship policy instead of your children. A dynasty trust could provide for multiple generations, to your grandchildren and future generations. Most living trusts terminate as a matter of law after a few generations. A dynasty trust is a perpetual trust and can go on without an end date. 

Our attorneys can answer your questions about survivorship life insurance and help you craft an estate plan that meets your needs and goals. Call Bogin, Munns, & Munns today at (855) 686-6752 to get started.

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