Survivorship life insurance is a type of policy that provides coverage for two individuals and pays out a death benefit only after both have passed away. This type of insurance has been popular among affluent couples looking to reduce the tax burden on their heirs. However, it can also serve as a valuable estate planning tool, meeting various financial needs.
It is important to understand how survivorship life insurance works, when it may be a good fit, and to consider alternative options. This can help you determine if this type of coverage is right for you.
What are Survivorship Life Insurance Policies?
Survivorship life insurance, also known as “second-to-die” life insurance, is a type of life insurance policy that provides a death benefit only after the second insured person has died. This type of policy is often used by couples or business partners to provide financial protection for their surviving loved ones or to help pay estate taxes and other debts.
Survivorship life insurance policies are typically taken out by two people, typically a married couple, who are the insureds under the policy. The death benefit is paid out when the second insured person passes away. The death benefit can be used to cover final expenses, pay off debts, or provide a source of income for the surviving beneficiaries.
Does Life Insurance Get Included in an Estate?
Life insurance can be included in an estate. The proceeds from a life insurance policy are generally paid to the named beneficiaries, who can use the funds to pay estate taxes, debts, and final expenses. The death benefit from a life insurance policy can be an important source of liquidity for an estate, helping to preserve its value for the surviving beneficiaries.
In some cases, life insurance policies can be owned by a trust, which can provide additional estate planning benefits, such as avoiding probate and protecting the assets from creditors. The life insurance proceeds can then be used to fund the trust, which can provide a source of income for the beneficiaries, pay estate taxes, and cover other expenses.
When considering survivorship life insurance as part of an estate plan, it is important to work with a knowledgeable estate planning attorney and insurance professional. They can help ensure that the policy is structured and funded in a manner that is consistent with the policyholders’ goals and that the policy will provide the desired benefits in the event of their deaths.
What happens when life insurance goes to an estate?
When life insurance proceeds are paid to an estate, they become part of the estate and are subject to the same rules and procedures as other assets in the estate. Here’s what could happen:
Probate. If the life insurance policy was owned by the deceased person and was not held in a trust, the death benefit will typically be paid to the estate and may be subject to probate.
Estate Administration. If the life insurance death benefit is included in the estate, it will be administered by the executor or administrator of the estate.
Estate taxes. The death benefit from a life insurance policy may be subject to estate taxes, depending on the size of the estate and the applicable tax laws.
Advantages of Survivorship Life Insurance Policies
Survivorship life insurance policies offer several advantages, including:
- Estate planning: Survivorship life insurance can be used as a part of an estate planning strategy to help pay estate taxes and other debts, and to provide a source of income for the surviving beneficiaries.
- Cost-effective: Survivorship life insurance is typically less expensive than two individual life insurance policies, making it a cost-effective option for couples or business partners who want to provide financial protection for their loved ones.
- Tax-free income: The death benefit from a survivorship life insurance policy is typically paid out tax-free, providing a significant source of tax-free income for the surviving beneficiaries.
- Flexibility: Survivorship life insurance policies often have flexible premium options, allowing policyholders to choose the amount and frequency of their premium payments.
- No medical exams: Some survivorship life insurance policies do not require medical exams, making it easier for individuals who may not otherwise qualify for individual life insurance to obtain coverage.
- Simplified underwriting: Because the death benefit is paid out only after the second insured person has died, survivorship life insurance policies often have simplified underwriting, making it easier and faster to obtain coverage.
- Estate preservation: By providing a source of income and financial protection for the surviving beneficiaries, survivorship life insurance can help to preserve the value of an estate and reduce the financial burden on the surviving family members.
How are Survivorship Life Insurance Policies Beneficial for Estate Planning?
Survivorship life insurance policies can be a valuable tool in estate planning for several reasons:
- Estate taxes: Estate taxes can be a significant financial burden for surviving family members, but a survivorship life insurance policy can provide a source of funds to pay these taxes, preserving the value of the estate for the surviving beneficiaries.
- Debts and final expenses: A survivorship life insurance policy can provide funds to pay off debts and final expenses, such as funeral costs and medical bills, helping to ease the financial burden on the surviving family members.
- Liquidity: Estate taxes and debts must often be paid quickly, but the assets in an estate may not be easily liquidated. A survivorship life insurance policy can provide the necessary liquidity to pay these expenses, preserving the value of the estate.
- Income replacement: If one spouse was the primary income earner, a survivorship life insurance policy can provide a source of income for the surviving spouse, helping to ease the financial burden and ensuring a secure future.
- Avoidance of probate: The death benefit from a survivorship life insurance policy is paid directly to the beneficiaries, bypassing the probate process. This can help to avoid the time and expense of probate and ensure that the assets are distributed according to the policyholder’s wishes.
Schedule a Consultation with a Estate Planning Attorney
At Galanti & Copenhaver, Inc., we know that understanding how to incorporate life insurance policies into your estate plan can be a complicated process. Our dedicated team is ready to answer any questions you may have. Schedule a consultation today!