The last several columns could best be described as an overview of life insurance. We discussed various forms of term and permanent plans along with an incredibly valuable rider to cover possible long term care expenses. I will now wrap up the discussion with an explanation of a style of policy that by design just lends itself to estate planning purposes.
This is survivorship life insurance. As the name would imply, it does not pay its proceeds until the last survivor should pass. As this is typically used in family planning situations, this would be the last spouse. By far, this gives us the most bang for our bucks as we are insuring two lives instead of one. Actuarially, this is a distinct advantage for lower pricing. Another factor to consider is that we have the benefit of the female spouse. Meaning their longevity. Women far outlive us men and this is also positively reflected in lower premiums. What this means out here in the real world is that you can generally purchase about twice as much face amount in a survivorship policy as you could in an individual policy for the same money. This fact becomes vitally important in estate planning scenarios as we typically need large to very large dollar amounts of benefits. This then leads to proportionately high premiums. Affordability and cash flow concerns quickly become apparent and anything we can do to keep these costs down is welcome relief.
As for the type of plan, we always want to use a permanent style plan for survivorship policies. I personally recommend either traditional universal life or equity indexed universal life. You can refer to previous column for a thorough explanation of universal life. In a condensed version, universal life will allow us the most benefit per dollar invested. When designed properly we can provide for sufficiently strong guarantees without any waste by having any excess money wrapped up in cash value. Beyond plans, an educated discussion needs to be made on proper ownership of life insurance and this becomes even more imperative with survivorship plans as the face amounts are generally high. As always, seek out the advice of seasoned professional advisors when considering if planning such as this will work for you and your family.
And just as importantly, these policies pay out the much needed funds exactly when typically needed. Once the last spouse passes the estate is ultimately settled and distributed. At this point, money is needed for a variety of reasons. The need for liquidity to balance the estate between farm and non-farm heirs is a common theme. Estate taxes have been an accepted use for years and while things currently look a bit better, do not hold your breath folks. It's far better to be prepared than caught at the mercy of Congress. The tax laws are only as permanent as those who hold office and always have and always will continue to waver in whatever direction the political winds are blowing. Once the value of providing highly leveraged tax free benefits are fully understood, many folks choose to use this financial tool as an affordable way to leave a large legacy for both family and charitable purposes.
Today's survivorship plans are among the most powerful financial products available and serve as the cornerstone that holds a great many financial and estate plans together. I personally rely on them to help families in my own practice to a great extent. With proper design and implementation, they provide families with an affordable and workable solution for numerous needs as part of a comprehensive plan.
Dennis Foster has been helping families with financial and estate planning needs for 25 years. He welcomes comments and questions and can be reached at 605-887-7069 or [email protected].