Because I have been vocal with my criticism of the inappropriate sale of insurance-based products, some people have concluded that I have a prejudice against insurance and the agents who sell it. Actually, the opposite is true. Insurance can be a valuable tool to help individuals, families and businesses create, protect and distribute wealth.
In its most basic form, the purpose of any type of insurance is to transfer the risk of a negative occurrence from one's self to an insurance company. For example, you don't buy auto insurance because you want to benefit from it. But if you're involved in a collision, your auto insurance policy will pay potentially thousands of dollars to repair or replace your car.
The same risk transfer principle applies to life, health and disability insurance. The death of one partner in a working couple might affect the surviving family's retirement security or jeopardize the remaining parent's ability to pay for the education of children. If your death will cause financial harm to others, you should consider purchasing a life insurance policy whose proceeds can help to replace the loss of your earning capacity. Stay-at-home mothers, who don't earn a salary in the traditional sense, also have a significant economic worth. If a woman dies prematurely, leaving a spouse and small children behind, her husband would have to either quit his job or hire someone to care for the kids. Life insurance proceeds would help to cover the cost.
A survivorship policy is a special type of life insurance that isn't as widely understood as traditional life insurance. Also called "second-to-die" insurance, this type of policy insures two lives in one contract. The death benefit is paid only after the second person dies. For this reason, the cost of a survivorship policy is typically much lower than two separate policies with the same combined benefit.
Why would you use a survivorship policy? These policies have traditionally been used by wealthy families to help pay estate settlement costs and taxes. Although current federal estate tax law allows unlimited death transfers to surviving spouses, assets remaining in the survivor's estate can still be subject to estate taxation at the second death. In 2008, the federal exemption limit is $2 million. After 2010, the exemption is scheduled to return to a reduced level of $1 million unless Congress enacts new legislation. The proceeds from a survivorship policy can be used to pay those costs, keeping the couple's assets intact for their beneficiaries.
Survivorship insurance can be used to create a more substantial inheritance for your heirs. Because of its reasonable cost, a couple without significant wealth can buy a survivorship policy with a larger death benefit than they otherwise might be able to afford.
Parents of a child with special needs due to a physical or mental disability can use survivorship insurance to create a pool of money to care for that child after they are gone. If the child receives government assistance, it's essential to carefully plan for proper ownership and beneficiary designations to avoid inadvertently disqualifying the child's entitlements.
Besides its reasonable cost, one particular advantage of survivorship insurance is that otherwise uninsurable individuals can still qualify. Since the policy only pays a benefit after the second death, the poor health of one party isn't as big a concern to the insurance company as it would be for an individual policy.
Unless the policy has been set up to be paid in full over a specific number of years, it's possible that the survivor will be required to keep paying premiums after the first death. Before purchasing such a policy, be sure the premiums will continue to be affordable regardless who dies first.
These types of policies are often owned by irrevocable life insurance trusts, which are also named as the beneficiary of the policy proceeds; the language of the trust itself specifies the ultimate distribution to your heirs.
Special tax regulations permit the insured individuals to make gifts of cash to the trust, which are used by the trustee to pay the insurance premiums.
As with all types of life insurance, you need to determine an appropriate death benefit , which type of policy best suits your needs, and have a thorough understanding of the costs, guarantees, cash value, and other factors.
source:http://www.seacoastonline.com/apps/pbcs.dll/article?AID=/20080413/BIZ/804130315&sfad=1
Sunday, April 13, 2008
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