How Survivorship Life Insurance Helps in Estate Planning

How Survivorship Life Insurance Helps in Estate Planning

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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7. Adjustable Life Insurance: Pros Cons of Flexible Premiums

Adjustable life insurance is a permanent policy that gives policyholders the flexibility to change the premiums, death benefit and cash (21)

Find your life insurance policy with John Hancock that protects your loved ones and can align with your financial goals and needs.(22)

Most policies cover one insured—we call these single life policies. Survivorship policies cover two insureds, with no death benefit paid until both insureds (23)

How do you get a survivorship policy?

Steps couples take in the purchase of a survivorship life insurance policy include:

  • Assess: Couples taking an account of their personal situation to assess the needs of the family after one spouse dies and after both spouses die creates the framework required to determine the type of policy and the size of policy required in order to meet responsibilities.
  • Ask for recommendations: Tap family and community members for any insights or recommendations for insurers.
  • Seek professional guidance: Financial advisors and estate planning attorneys understand the perils, pitfalls and loopholes of various insurance products. Their expertise ensures any policies purchased by a couple provide the required coverage levels.
  • Look at insurers’ customer reviews: When considering any particular insurer, looking over customer reviews provides a snapshot of the level and quality of service provided by the agency.
  • Compare quotes and coverage: Once couples narrow down their policy search to just a few insurers, compare offerings in terms of premiums and coverage to find the best deal.

By taking the time to perform due diligence before buying a survivorship policy, couples achieve peace of mind. Knowing a policy serves their desires around their estate and also meets the needs of beneficiaries provides assurances that alleviate worry and anxiety.

Getting a Survivorship Universal Life Insurance Quote

As survivorship life insurance is a less common policy than other universal life insurance policies, you may need to hunt around for companies that issue this policy. This policy is also called a second-to-die policy.

Since with a survivorship life insurance policy, you’re insuring two lives – you and your spouse or business partner – you likely won’t be able to find a quote online. Additionally, the popularity of this policy has decreased in recent years due to legislative changes.

Instead of getting an online quote, you may need to contact the insurance companies you’d like quotes from and provide the necessary details to a representative.

In order to receive an insurance quote, you’ll provide certain details about yourself and the second person on the policy (spouse or business partner). For both of you, be prepared to provide your zip code, address, date of birth, gender, height and weight. You’ll likely have to answer questions about your health status and personal habits (including whether you’re a smoker or not). Other factors that could affect your survivorship universal life insurance quotes include your driving record, hobbies and occupation.

With survivorship universal life insurance policy, your insurance company only pays out when both insureds – like you and your spouse – die, meaning this type of universal life insurance can be more affordable than other options.

Federal Estate Tax Exemption 

There have been many changes in how estates have been taxed over the years. With the new Biden administration, there certainly could be many more to come as well.

These tax changes have affected the purchasing decisions on life insurance for affluent families throughout the United States.

The most significant change to the estate tax code was the recent increase in an unlimited marital deduction in early 2018.

Under current federal tax law, a marital deduction permits you to leave an unlimited amount of assets to your surviving spouse.

If you leave all your assets to your spouse, no federal estate taxes are owed at the time of your death. Those assets then become part of the spouse’s estate and might be taxed when your surviving spouse eventually dies.  

A husband and wife can each get their exemption of $12.06 million, meaning a couple will be able to give away $24.12 million tax-free in 2022 (provided they have not made prior lifetime gifts), but it’s not automatic.

An unlimited marital deduction allows you to leave all or part of your assets to your surviving spouse free of the federal estate tax.

But, to utilize your late spouse’s unused exemption, an election called portability needs to be made on the estate tax return of the first spouse to die.

The portability election of the federal estate tax exemption means that if one spouse dies and does not make full use of their $12,060,000 federal estate tax exemption, the surviving spouse can make an election to exercise the unused exemption and add it to the surviving spouse’s exemption.

This portability election means that a married couple can pass on a whopping $24,120,000 to their children free from federal estate taxes in 2022!

The current estate tax rates between 18-40% apply to the estate’s value above the exemption amount.

However, there could be changes to the current income and estate tax law under the Biden administration.

First, President Biden has proposed increasing the estate and gift tax rates to a new top rate of 45%. 

Then, he wants to substantially lower the estate tax exemption equivalent to $3.5 million per individual and $7 million for a married couple.

These dramatic changes would increase the estate tax liabilities for millions of American’s and would eventually take Congressional support.

Stay tuned for additional tax planning ideas coming in 2022!

We recommend doing some estate planning with a qualified insurance agent and estate planning attorney, so your family does not get hit with a surprise federal estate tax bill.

You might find yourself taking a second look at a survivorship policy as an estate planning tool to protect your family.

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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Joint Life Insurance vs. Survivorship Life Insurance: Whats the Difference?

Joint life insurance is when an insurance policy covers multiple people on one policy. There are two options for joint life insurance:

  • First-to-die
  • Survivorship life insurance or second-to-die

The standard option for "joint life" is often a "first-to-die" policy. In a "first-to-die" joint life insurance policy, if one of the insured spouses dies, the death benefit becomes payable to the remaining spouse as the beneficiary. The objective is to leave money behind to the spouse to help them with living expenses and to replace the lost income from the death of the first-to-die partner.

Survivorship life insurance works differently. It is a joint life insurance policy and it covers both people but will only pay out when both insured people have died. This is why it may be known as "second-to-die."

The strategy in a survivorship life insurance policy is to leave behind money to the heirs of the couple, as opposed to in a joint life "first to die" life insurance policy that instead leaves the death benefit to a spouse.

4. What Is Survivorship Life Insurance? Business Insider

Survivorship life insurance for couples doesn’t pay death benefits until joint life insurance policies can be beneficial for high-wealth (9)

Provide funds to help pay taxes. Survivorship life insurance policies are useful in estate planning because they can provide money to pay taxes on assets. The (10)

Find the right Life Insurance policy by comparing live quotes across a range of different policy types from the most reputable providers.(11)

The death benefit from a survivorship life insurance policy is typically calculated to pay federal estate taxes and other estate-settlement costs owed after (12)

Variable survivorship life insurance is a type of variable life insurance policy that covers two individuals and pays a death benefit to a beneficiary only (13)

Who needs a survivorship life insurance policy?

Primarily designed for individuals concerned with estate planning or those with permanent dependent responsibilities, survivorship policies sometimes also fit the bill for others in particular circumstances. Personal circumstances warranting exploration into survivorship policies include couples who:

  • Find individual term policies unaffordable
  • Include one spouse declined for life insurance while the other spouse maintains good health
  • Need a cash value life insurance policy

While survivorship life insurance policies predominately serve the insurance needs of individuals concerned with estate planning or lifelong dependent care, the product also stretches its utility to a select demographic. Nonetheless, the benefits of a survivorship policies apply to only very specific situations that make the delayed payout of the death benefit worthwhile.

Survivorship Universal Life Insurance Quotes: Choosing an Insurance Policy

Photo credit: ©iStock.com/razerbird

The premium with a survivorship universal life insurance policy is usually lower than it would be for two separate life insurance policies. With other permanent life policies, the death benefit is paid out upon the insured’s death. But survivorship universal life insurance is different in that the death benefit is only paid out when both insureds under the policy die. Wealthy couples are the most likely to opt for this insurance type, but business partners may also opt for it. Often the goal behind survivorship universal life insurance is for the death benefit to cover the cost of estate taxes. In the case of business partners, this insurance may be used to cover the costs of transferring the ownership of a business.

You may also see this policy referred to as a “second-to-die” insurance.

Typically a survivorship universal life insurance policy’s death benefit is used to pay federal estate taxes and other estate settlement costs incurred after your death. However, a federal law allows you a marital deduction so you can leave an unlimited amount of assets – including the cash value of your universal insurance policy’s investment portion – to your surviving spouse. If you choose that route, then no federal estate taxes are owed upon your death. Instead, your assets merge with your spouse’s estate and will be taxed when your spouse dies.

What’s the upside of this survivorship universal life insurance policy? It may help pay or off-set those estate taxes.

Situations where a survivorship policy can be useful

  • Estate planning strategies. Survivorship life insurance is often used by high net worth couples who want to lessen the tax burden for their children after they die. A surviving spouse doesn’t have to pay taxes after the first spouse dies. However, if their resulting assets exceed the federal exemption level (currently $11.7 million), then federal estate taxes – which can run as high as 40%4 – must be paid after the second spouse dies. Currently, 12 states and the District of Columbia tax estates at an even lower threshold, and six have inheritance taxes.5 A survivorship policy can help provide immediate cash flow to pay estate taxes and related costs once both spouses die. It can also help equalize the distribution of assets among heirs, especially when assets (like a family business) can’t be easily sold. Before buying insurance or other financial products for this purpose, you should consult with a personal finance professional and tax professional who can provide appropriate tax and investment guidance.
  • Business succession planning strategies. Survivorship policy owners can be any two people, including business partners. A survivorship policy can provide the liquidity needed to transfer business ownership if both partners die. Or, the death benefit can be divided among the partners’ heirs to help ensure they are financially prepared to take over the business.
  • Special-needs planning strategies. Survivorship insurance helps parents who have a special-needs child(ren) ensure their children will be taken care of after they die. Survivorship policies are sometimes used to fund a Trust to provide care for their special needs children.
  • Medical issues workaround. A survivorship policy can be a more cost-effective way to get coverage in situations where one spouse cannot afford individual life insurance due to a medical condition, but the other is in good health.
  • Charitable giving. A survivorship life policy can be set up to leave a legacy to a specific charity upon the death of both policyholders. The flexibility of universal life can make it valuable for this use. It allows you to grow tax-deferred cash value that can still be accessed, as well as raise or reduce your premiums as needed.6

Reasons to Purchase Second-to-Die Insurance

More economical

The premium is based on the joint life expectancy of a couple, and because it pays nothing until both spouses die, the premium is significantly less expensive than buying separate policies for both people with the same total dollar amount in benefits.

Easier qualification

If one person isn't in great health, it doesn't matter as much because both policyholders must die before benefits are paid. Otherwise, the person in bad health may be denied life insurance if applying for a single policy.

Estate planning

In some cases, second-to-die life insurance can actually help build an estate, not just protect it from taxes. Like traditional life insurance, the death benefit of a second-to-die policy can ensure your beneficiaries receive a minimum amount of money, even if all the savings of the insured were depleted during their lives.

Maintains an estate

Many people buy second-to-die life insurance policies in order to ensure their estate transfers to their beneficiaries intact. For example, they may want to know the family cabin will remain in use for generations, rather than be sold to pay death taxes.

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