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When putting together your life insurance plan, there are many ways you can customize it to make it appropriate for your personal situation. One of these is an estate protection rider. An estate protection rider is designed to offset any estate taxes that your family might incur if your life insurance is considered part of your estate. Estate protection riders vary in value, but typically are designed to cover a certain percentage or dollar amount of your life insurance policy. There is usually a time limit that determines how long the estate protection rider is valid for after the policyholder passes away. The rider is typically valid for a few years. They are a very effective way to handle expensive estate taxes for wealthy families, because they give you the cash flow you need to pay the estate taxes without affecting other aspects of your family’s financial strategy.

Estate Protection Riders Explained

estate protection riderEstate protection riders can vary depending on which insurance provider you use and what type of policy you are choosing to apply it to. In most cases, these policies are applied for policies that cover both you and your spouse, called survivorship policies. If you both pass away within a few years of each other, your children or other beneficiaries could be leveled with a large estate tax that they weren’t prepared for. An estate protection rider provides them with the extra financial support necessary to cover the taxes in this scenario.

Survivorship life insurance is designed to insure married couples. Unlike other life insurance policies, this one will not pay out until both spouses have passed away. These policies are traditionally used by wealthy families in conjunction with existing survivorship tax policy, which essentially states that couples should not have to pay estate taxes until both spouses die. This prevents one spouse from being stuck with high tax bills that could negatively affect their eventual beneficiaries’ financial security.

For wealthy families, there are many advantages to survivorship life insurance besides just the estate protection rider. For example, it’s much easier to qualify for this type of insurance, because providers consider insuring two people to be less of a risk than insuring one person. It also provides coverage for your entire life, and is much more affordable than taking out two life insurance policies.

Do You Need An Estate Protection Rider?

Not everyone is going to need an estate protection rider for their life insurance policy. If you aren’t planning on leaving a large estate behind, there isn’t going to be much benefit for you from taking out this kind of policy. These policies are also most effective for wealthy families because they don’t need to use the life insurance benefit to pay for funeral costs, and instead can apply it to estate taxes. If there is a chance your family will need the money for other reasons after your death, this strategy may not be as effective. Finally, it’s very important that you and your spouse stay together for an estate protection rider to work. Keep this in mind when planning to avoid complex policy challenges later on.

You also may have another financial planning strategy in place to address your estate taxes, in which case the rider may not be necessary. However, if you and your spouse are planning your estate now, it’s worth looking at this type of rider to determine if it will be necessary or helpful for you later on. Since estate protection riders (and estate planning in general) can be very complex, it will be helpful to talk to a professional independent life insurance agent to help you find the most effective policy for your needs. It’s also very important that you work with a professional with expertise in tax law and financial planning to ensure that your estate is set up in a way that will benefit your family most. There are additional estate insurance plans and tax strategies that can help you.