Pros and Cons of Survivorship Life Insurance

Pros and Cons of Survivorship Life Insurance If you are wealthy and married, then survivorship life insurance is something you should consider. Survivorship life insurance is also referred to as second-to-die life insurance because the death benefits are paid out only after both spouses die.

A survivorship policy can either be a term life policy or a permanent one. Survivorship life insurance does not work like a typical life insurance policy. Then again, a survivorship policy is seldom bought with the intention of life insurance coverage. Rather, it is an avenue for wealthy families to plan their estates better, or put off paying estate taxes until the second spouse's death.

A life insurance trust and survivorship policies
Though life insurance benefits are income tax free, the proceeds can attract federal tax under certain circumstances. To avoid this, survivorship life insurance is commonly purchased in the name of a trust, so that proceeds of the policy are not included in the insured's estate. Forming a trust and transferring the survivorship policy to the trust can avoid federal tax on life insurance proceeds, especially in the case of huge death benefits. This is because the death benefits are handed over to the trust and your beneficiaries are paid by the trust conveniently avoiding federal taxes on the estate.

Advantages of survivorship policies

Why do married couples choose to buy survivorship policies?

1. Survivorship policies are cheaper than individually owned policies because the insurance company has to pay off the death benefit only once.
2. It is a great way to get insurance for a spouse who has health complications because the underwriting procedure is not as stringent as in the case of other permanent or term life policies. Since the combined life expectancy is high, the focus is usually on the healthier spouse.
3. Wealthy couples opt for a survivorship policy as an important tool in estate planning because the cash benefit from it can be worked out to offset estate taxes.
4. A survivorship policy executed through a life insurance trust is a convenient way to avoid federal tax, as explained earlier in this article.
5. A trust-survivorship policy combination can be useful in other cases as well. For instance, when a family has children with special needs, this is not just a way to avoid tax, but also to provide for the child keeping in mind that they will be disqualified from federal and state assistance if they are the recipients of more than $2000 through an inheritance. Another instance is when the death benefits are intended for donations to charities. When disbursed by a trust, they bypass heavy estate taxes and more money can be made available to a worthy cause.
6. Estate taxes can be deferred until the second spouse's death.
7. Large inheritors of the insured's wealth can use the death benefits of a survivorship policy to pay off estate taxes, gift taxes, etc.
8. When the estate consists of hard assets, it is difficult for the beneficiaries to pay off taxes without resorting to a distress sale. The proceeds of a survivorship policy will help beneficiaries avoid this situation by providing them with liquid cash for these disbursements.

Disadvantages of survivorship policies

1. Survivorship life insurance policies cannot be altered once written. Decide well before signing on a policy because the premium amounts can never be changed at a later date.
2. The younger policy owner will end up paying more than he or she would pay on a normal permanent or term life policy because premiums are worked out on the basis of the average age of both policyholders.
3. Survivorship policies are most beneficial when executed through a trust. However, forming a trust and appointing a trustee is not an easy job. Further, once a trust is made the beneficiary, the insured can't have access to the cash values associated with the policy during his or her lifetime.
4. Since survivorship policies are many times meant to pay off estate taxes on the death of the second spouse, it is very difficult to estimate the coverage because you have to predict the life span of two individuals.

More about survivorship policies

• A divorce could complicate a survivorship policy. Your insurance agency will be able to offer you a rider option in the case of a divorce.
• Since death benefits are paid out only on the second spouse's death, make sure that you take another permanent or term life insurance policy to cover the surviving spouse.
• A survivorship policy is not to be confused with a joint life policy. In the case of a joint life policy, the death benefit is paid out after one of the insured dies, while in the case of survivorship policies the death benefit is given only after the second spouse dies.

When you have worked hard and managed to build up a lot of assets, it should rightfully be yours to decide how it is used after your death. A survivorship policy gives you more control over your money.

AccuQuote is a leader in providing term life quotes to people across the United States. In 1986 it began operating with a single goal: to make the process of buying term life insurance as easy as possible for its customers. Their experienced professionals consistently deliver the most affordable term life insurance rates by comparing thousands of life insurance policies from dozens of top-rated carriers. Article Source: http://EzineArticles.com/?expert=Denise_M