Survivorship policies have been in the financial news world lately to accomplish a lot of different things. The likely passing of the new tax bill that the current administration is eager push forward by the end of the year has brought to light a very dark, seemingly unavoidable reality for small business owners and high net-worth families. If you aren’t familiar with what the new tax bill entails, check out the article we wrote last week at:
What’s a Survivorship Policy?
So, what is a survivorship policy anyway? Well, it’s a form of permanent life insurance that is designed to build useable cash value, provide a large death benefit, cover both spouses (or business partner), and act as a parachute for the tax-burden-- a.k.a. estate tax-- that will come with the passing of the “second-to-pass” spouse. The idea behind these policies is to have a solidified plan—when the time comes—to transfer ownership of assets to heirs.
Survivorship policies don’t pay the death benefit out until both policy owners have died, these policies tend to have a much higher death benefit, as opposed to individual policies. Survivorship policies can be either whole life, universal life, or variable universal life policies.
Most importantly, just like a traditional permanent life policy, the death benefit is completely tax-free.
These policies aren’t necessarily ideal for couples who would rely on the missing income of a spouse as a form of income replacement because the death benefit isn’t paid until both individuals have died. In that particular case, I would recommend term or traditional whole life. However, as I mentioned before, this product would be placed with the true “end” in mind.
Why a Survivorship Policy?
This strategy has three parts that make it highly effective for small businesses or higher net-worth earners: estate planning, business succession planning, and high death benefit/operating capital.
- Estate Planning
As I mentioned before, this form of permanent life insurance provides a proverbial safety net when it comes to the tax implications of a couple or business worth more than $6.35 million—we are relating that number to the new tax bill implications. So, let’s for instance say that you are the owner of a farm or other small business worth $7+ million—this is a perfect product for you.
Think of it this way, small business owners and high net-worth families: what does your accountant have you do around tax season every year? They want you to get to zero or go buy something you can depreciate and claim as a business expense, correct? Well, what if you were able to buy your net worth as a family or business and do the same thing to your tax liability upon death? Would you rather have your heirs go get a bank loan to keep the business floating or would you rather have them be able to start with the business free and clear? Not only that, what if you have heirs who are uninterested in running the business when you’re gone—what if it’s a split decision between heirs equally?
In a traditional format without this type of policy, you’re not only looking at a multi-million-dollar buyout between your heirs that ARE interested in running the business, but you’ve also got a giant tax bill that awaits them as well. What’s worse—a high tax liability or an inter-family fight on who gets what and what’s fair? In my opinion, both are an absolute nightmare situation.
Something to think about!
What’s more, under current law, married couples aren’t liable for estate taxes after the first spouse passes away because all marital deductions allow for the first to die to pass unlimited assets along to the surviving spouse, tax-free. Estate taxes however are due upon the death of the second spouse or business partner, opening the floodgates for potentially a massive tax bill to the family or heirs of the business—upwards of 37-40% in fact.
In other words, these policies come into play to provide liquidity to pay the administrative costs and estate taxes due on your estate, once both spouses are gone. If you don’t set this up effectively, you’re looking at a proverbial fire sale of all assets at a price well below market value, simply to cover the tax burden.
- Business Succession Planning
Whether it be family-owned or two unrelated business partners, you don’t have to be married to implement a survivorship policy. You could even do a parent and a child survivorship policy if you wanted to. Nonetheless, the idea of doing this type of policy for business owners would be to make sure the death benefit is divided equally among business partners’ heirs. This would ensure that the people interested in taking over the business would be in an actual position to do so—all while parties uninterested in the business would essentially receive their “buyout” by way of the death benefit.
You’d see this in buy-sell agreement plans where the death benefit of the business partner—in the case of their untimely death—would ensure that the business would survive without them. Additionally, the death benefit taken by the surviving partner can be used to buy out the decedent’s heirs.
- High Death Benefit/Operating Capital
Let’s first point out that at Lyvfin, we aren’t partial to any one particular-product. We place products as we see them fit for you, your family, or your business, respectively. For that reason, this particular-product strategy should be placed at the right time, with the right situation, and the right premium. When planning for the unknown, we want to cover all our bases—situationally, this concept works best with business owners and high net-worth individuals, as I mentioned earlier in this article.
The two main benefits that we see with this strategy is the high death benefit and operating capital that grows inside the cash value portion of the policy.
- High Death Benefit
Simply put, there is a higher death benefit because the policy is covering two people. However, the most beneficial part to this strategy as it pertains to the death benefit is that, in most cases, couples will have different insurability ratings and we’re able to cover them both with this policy. So, instead of having a higher cost of insurance on one individual, we are getting a technical “2 for 1” inside of one policy. This then allows the insurance company to offer a higher death benefit, in all likelihood because of the “better” rating on one of the two people insured. By having a higher death benefit, we are successfully setting the heirs of the couple or business up for a favorable outcome upon the inevitable death and passing of the torch.
- Operating Capital
Survivorship policies are permanent policies, so there is a cash value portion to them. In general, we aren’t an agency that simply writes a “$500,000 whole life policy.” I mentioned it before, but I’ll mention it again: we place products based on the client’s needs, not blindly throwing darts at an invisible dart board, hoping something sticks! We set these types of policies up to allow operating capital to be to focal point. This means we are making sure that anywhere from 60-90% of the premium you’re putting into the policy is available for the owner(s) of the policy, year one.
Of course, an analysis of “how much” is taken into consideration when we are implementing this strategy, just like anything else! “How much” meaning: desired death benefit, operating capital, and flexibility is taken into consideration. This strategy should allow you to enjoy the living benefits of it, not just the death benefit.
Wrap Up
Strategically placing products to enhance your current and future financial situation is one of the main passions we have at Lyvfin. Your life’s work and legacy should be in the control of you and your family or business partner(s), not the government. We strive to bring you the most effective strategies in doing just that.
As always, connect with us so we can help you and your family or business—or both!