Parents want the best for their kids...it's only natural. You've worked hard to create an enriching life for them, and now you have a good amount of money and other assets to pass down. But did you know that all your hard work and planning could go to waste without the right estate planning?
The Problem: A Potential Tax Burden
Many parents don't think about how they're going to pass down their money, property, and other assets to their kids. They think that writing a will is all they have to do, and the rest takes care of itself. Unfortunately, the tax code and legal system sometimes get in the way of a parent's good intentions. Without the right planning, your kids could have to pay twice to inherit what you left behind.
The Solution: Survivorship Life Insurance
A survivorship policy is one policy that covers two people, usually a husband and wife. Because two people are insured, the policy only pays out when the surviving spouse passes away. At that time, the death benefit is paid to the children (or other beneficiaries).
So why is this a better idea if you're trying to pass down wealth to your kids? Let's say Mr. and Mrs. Brady each have an individual life insurance policy for $750,000. They have named each other as a beneficiary. When Mr. Brady dies, Mrs. Brady gets the death benefit income-tax free. She doesn't spend much of it, and leaves $700,000 behind. When she passes away, her kids get the full death benefit from her policy, but the remainder of Mr. Brady's policy — that $700,000 — counts as income, and the Brady kids will need to pay income tax on that. And we haven't even mentioned the possibility of additional estate tax.
With a survivorship policy, one policy could have covered both Mr. and Mrs. Brady, delivering one death benefit in the amount of $1.5 million to the children, completely income-tax free.
Is a Survivorship Policy Right for You?
So how do you know if your kids will have to pay the estate tax? As of 2018, the threshold is $5.6 million (with yearly increases for inflation). If the total value of your home, property, assets, cash, and stocks are near this threshold, a survivorship policy is a smart move for your family. It will ensure your kids have the cash they need to pay the estate tax.
There's another piece of good news. These policies are often easier to qualify for than two individual life insurance policies. The underwriting rules are relaxed since there are two of you on the policy. Even if one of you has a bad medical history, you can still get coverage. We just need one of you to be insurable in order to qualify.
Whether your spouse would have trouble getting insured on their own, or you're worried about the estate tax, a survivorship policy can help you safely pass wealth to your loved ones. After all, life insurance is for the ones you love.