An Estate Planning Solution and Estate Planning Tool
Survivorship life insurance, also known as a second-to-die policy, is an essential tool for estate planning, inheritance planning, and seeing to it that special needs dependents are financially taken care of when the insureds die.
It’s referred to as second-to-die because the policy does not pay out until both insureds (typically spouses) have passed away. This coverage was designed to protect heirs to an estate from the tax liability that typically comes with an inheritance of a large estate like a family farm or business.
Advantages of Survivorship Life Insurance
Any type of life insurance can be used to protect heirs and special-needs dependents from tax liability and the possible loss of benefits from government programs but a survivorship policy using cash-value life insurance like whole life or universal life works best.
It costs less than having two Separate Policies
When you compare the cost of a survivorship policy that covers two individuals to a single life insurance policy, the cost per $1,000 of insurance coverage is usually less expensive. This is because the premium is based on the joint life expectancy of both insureds and will not be paid out until both insureds have died.
Easier underwriting Requirements
Qualifying for a survivorship insurance policy is stressful because if one of the insureds has health issues, the company’s liberal underwriting guidelines will often allow the policy to be issued, often even if the applicant with health issues doesn’t qualify for traditional life insurance.
Accumulate Wealth to build an Estate
Even for those who have modest size estates, a survivorship life insurance using indexed universal life insurance can accumulate considerable wealth while offering a guaranteed death benefit. This allows the insured couple to provide the money needed after death for beneficiaries and create an asset that can be tapped when needed via policy loans.
Since the tax liability threshold changes over time, a survivorship life insurance policy guarantees that heirs will have the funds needed to protect the estate from estate and inheritance taxes which can be charged by the federal and state government.
Access to cash-value Tax-Free
If life events require the policyholders to withdraw funds from survivorship life insurance, it can be done using a policy loan which is not taxable since it is considered a return of premium. Although interest is charged on the policy loan, the funds are collateralized and not withdrawn meaning the policy’s cash account will continue to earn interest while a loan(s) is outstanding.
Cover the cost of care for Special Needs Dependents
Couples can use survivorship life insurance to make certain funds are available for a child with special needs for their care and financial security after the death of both parents. It is also important if you use this planning methodology to get individual life insurance to insure each parent’s income as well. The parents should also look into individual disability insurance. We have worked with other parents to help with this planning.
Drawbacks with Survivorship Life Insurance
Certainly, every life insurance can present drawbacks that are typically a result of life events that occur during the lives of the insureds and we’ve listed some examples below:
No death benefit is paid until the second insured has Passed Away
If you need life insurance to replace your income or pay off your mortgage when you die, Survivorship Life insurance is not a good choice since a death benefit is not paid until the death of the second insured.
It may even become a financial burden to a surviving spouse to continue the life insurance payments on two insureds after one of them has died. Remember, the purpose of the insurance is to protect heirs or create a financial legacy, not to provide for a surviving spouse.
Divorce can make things Messy
A couple with survivorship life insurance needs to understand that a divorce can create some issues for both insureds. Although no longer together, the life insurance remains in force and premiums need to be paid so the policy will not lapse. If either insured decides to remarry, the new spouse may or may not be comfortable with paying on life insurance for a previous spouse. If this happens, the insured couple should seek advice from an insurance agent and discuss their options with the policy.
Cash-value is Not the Focus
Although considerable cash value can accumulate in a survivorship life insurance policy, the insured couple should remain focused on the death benefit which is the reason for the policy in the first place. Although borrowing money from the policy’s cash value is an option, any outstanding loan and interest will be deducted from the death benefit for the beneficiary or beneficiaries.
Optional Riders to broaden your Coverage
Most of the riders that are available with traditional life insurance policies are also available with a Survivorship policy:
Accelerated Death Benefit
This valuable option provides for the insurance company to pay out a large portion of the death benefit if an insured is diagnosed with certain critical illnesses that could result in death within a year or two.
Estate Protection Benefit
This rider provides for the insureds to have additional term life insurance when an Irrevocable Life Insurance Trust has not been established before issuance of the policy and both of the insured persons die within four years. This additional term insurance mitigates the risk of taxes being levied against the death benefit and keeps the death benefit intact.
Policy Split Option
This rider allows the two owners of a survivorship policy to exchange the policy for two individual policies within a year of certain events like divorce or changes in the tax laws that could affect their estate.
Quotes for Survivorship Life Insurance Policies
If you want the most competitive insurance quotes on second to die policies, we have access to the leading and most competitive survivorship life policies available and would be happy to provide assistance in getting this important coverage in force for you. Please contact us at your convenience through our website or call us during normal business hours at (866) 691-0100.
Frequently asked Questions
Unless the insured couple has selected Policy Split Option, the policy would remain in force as long as they pay the premiums.
No. It’s cheaper to purchase one Survivorship policy that covers two people because the insurance company would consider the life expectancy of both insureds when developing the rates.
Yes. The cash that accumulates in your survivorship life insurance policy is available to you for any reason via policy loans, withdrawals, or total surrender of the policy.
Generally, people who buy survivorship or second-to-die life insurance do so to preserve their estate when it passes on to their heirs or to provide the funds needed to care for a special need dependent when both insureds have died.