You may not know this, but life insurance can be an incredibly useful estate planning tool. One question our team frequently encounters is, “How are survivorship life insurance policies helpful in estate planning?” Survivorship or “second-to-die” life insurance policies can be used in various ways in an estate plan, including to help cover estate taxes.
Batson Nolan PLC has proudly served Tennesseans for over 140 years and can help you plan for your family’s future.
What Is a Survivorship Life Insurance or “Second-To-Die” Policy?
A survivorship or “second-to-die” life insurance policy is a single policy with two policyholders. The coverage is not paid out to the designated beneficiaries until both policyholders pass away.
This type of life insurance is particularly beneficial to couples who want to grow their wealth and have the policy proceeds be used to pay estate taxes. High-net-worth individuals benefit most from this policy because the second policyholder will not need the funds to support themself when the first policyholder dies.
How Survivorship Life Insurance Works
Survivorship life insurance is paid out when both insureds pass away. Here’s how this might work in practice. Imagine a husband and wife take out a survivorship life insurance policy and name their children as the beneficiaries. The survivorship funds continue to mature until both of the insureds pass away, at which point the proceeds are paid out to the children. The children can save the funds for themselves, or they can use it to pay off the estate tax during the administration of their parents’ estates.
How Is a “Second-to-Die” Policy Different From a “First-To-Die” Life Insurance Policy?
In a “first-to-die” life insurance policy, the insurance company pays out the funds to the beneficiary when the policyholder dies. This type of insurance is appropriate if the beneficiary will depend on the proceeds once the insured passes away.
For example, let’s say a wife is the primary breadwinner and takes out a “first-to-die” life insurance policy. She names her husband as the beneficiary under the life insurance policy. When she passes away, he receives the proceeds of the insurance coverage per the contract.
How Are Survivorship Life Insurance Policies Helpful in Estate Planning?
There are many ways that clients can use a second-to-die life insurance policy as part of their estate planning strategy.
What Is an Estate Plan?
An estate plan consists of documents you and your estate planning attorney put together to plan what happens to your assets when you die. For example, you can write a will that gives your house or car to your spouse and gifts money to your children.
You can also use instruments such as trusts and life insurance policies to plan your estate. These are especially useful because they bypass the sometimes lengthy and costly probate process.
How Can I Use a Survivorship Life Insurance Policy as Part of My Estate Plan?
Two common ways that people incorporate survivorship life insurance into their estate plans are to cover estate tax costs and to care for special needs children or loved ones.
The current federal estate tax laws exclude up to $10 million of estate and gifts from taxation until 2026. That amount is $20 million for married people filing jointly. The basic exclusion amount of $10 million is adjusted annually for inflation. Estates valued at less than $10 million, or $20 million for married couples, will not feel the effects of the estate tax. But those whose assets are valued at more than this amount should consider planning a way to help pay for this tax to ease the financial burden on their beneficiaries. A survivorship policy is one way to accomplish that goal.
Another way to use a survivorship life insurance policy is to designate a loved one with special needs as the beneficiary. While the policyholders are alive, they can provide care for their loved one. Upon their death, they can have the policy pay for the support of their loved one or name a trust as the beneficiary, which can then provide support for their loved one.
Batson Nolan PLC: Estate Planning Attorneys Serving Tennessee Since 1860
Our estate planning attorneys understand that it can be challenging to create an estate plan. Planning for your family’s future can be an uncomfortable and emotional topic. But it’s essential to have a thoughtful plan in place so that your loved ones are cared for and so that they understand how you would like your assets to be divided. Our Lawyers have years of experience helping clients craft estate plans tailored to their needs, including advising them about when and how to appropriately use a second-to-die life insurance policy. If you have questions about how to use life insurance as part of your estate plan, call our office today or contact us online to schedule a consultation.