Any insurance policy is as good as you can make use of it. The insurance industry is highly innovative in designing life insurance products, and every product has multifarious uses so that it appeals to a large section of people. You will find an insurance policy for any need that you may have. You assign a value to your life by buying insurance policies and pass on the benefits of the sum assured to the survivors. To make proper use of insurance policies and to decide which kind of policy would be most suited for you, it is necessary to understand the policies well. It helps to determine how useful the policy would be for realizing the goals that you have set for the survivors’ benefit.
The diverse nature of insurance policies will become clear by studying the second to die term life insurance closely. As the name signifies, it is a lifetime policy that you can take in the name of at least two individuals preferably a couple and the death benefit passes on to none of the spouses even when one of them dies but goes to the survivors or inheritors. The second to die life insurance policies facilitate payment of estate taxes that can be substantial for some families. Although payment of estate duties is the most visible feature of the policy, you can utilize the policy in many other ways too.
Deferring estate tax payment
Estate taxes are quite high and paying it during one’s lifetime can become a significant liability. By taking advantage of the law, you can defer payment of estate taxes until the time you die but take care to ensure that survivors do not carry the burden. In such circumstances, survivorship or second to die life insurance policy is the best solution. The law has a provision for making a will that takes a marital deduction/bypass trust approach and helps to push back the federal estate taxes until the time you and your spouse die. When you and your spouse pass away, the survivors receive the proceeds from the policy and can use it for paying estate taxes. You should buy the policy through ILIT (irrevocable life insurance trust) so that the proceeds do not add up to the estate.
Funding for children with special needs
Parents of children with special needs are worried about what would happen to them when both parents die. To address the problem, they can establish a special needs trust and buy a second to die insurance policy through it. The scope of the trust defines the child as a discretionary beneficiary, which means that the child receives only what the trustee decides to pass on to the child. The assets of the trust are never the assets of the child and neither can the child claim any benefits from the trust, but the child stays qualified to receive government benefits like Medicaid that are needs based.
Business agreements for buying/selling
When both the husband and wife are actively involved in business and want to remain so until they die it means that they would like to sell the company, if at all, only when both of them die. In such cases, the couple can identify a buyer for the business and agree that the sale would be effective only when both husband and wife die. Since second to die policies are cheap, the buyer would buy a policy in the name of the present owners, husband, and wife, so that funds required for purchase are available on the death of both insured.
Wealth replacement trusts
Parents willing to make charity from their estates would like to ensure that the children do not resent the decision, as they would be reducing the inheritable estate by giving away some percentage to charity. To compensate for the loss, the parents can buy a survivorship insurance policy through ILIT so that on the death of both the husband and wife, the children receive the income as well as the money for paying estate taxes.
Spendthrift trusts
Some parents with a single child might be worried about the child who keeps spending without a thought. They are scared to think about how the child could manage the money when both of them die. To take care of the situation, they set up a spendthrift trust funded with a second to die insurance policy on their own lives. On the parents’ death, the trustee takes responsibility for the child’s need for funds and the creditors of the child will have no access to the funds.
You can use survivorship insurance policies in many ways and not for paying estate duties only for which it was created. It depends on how well you know the ways of using the policy to your advantage.
