Survivorship life insurance provides coverage for two individuals but disburses benefits solely upon the passing of the second person.
Second-to-die life insurance, also known as survivorship life insurance, is a unique policy that covers two individuals and pays out a single death benefit after both policyholders pass away. It falls under the category of joint life insurance, with the other type being first-to-die life insurance, which provides a benefit upon the death of the first policyholder. Survivorship life insurance is typically a permanent policy, such as whole or universal life.
This type of policy is often utilized by married couples aiming to provide financial security for their survivors or contribute to a charitable cause. Although less common, there are specific scenarios where a survivorship policy is advantageous:
- Providing for a loved one with special needs: Couples may opt for survivorship life insurance to ensure ongoing support for a disabled child after both parents are deceased.
- Addressing estate taxes: High-net-worth couples often acquire second-to-die policies to create liquidity for federal and state estate taxes.
- Leaving a charitable legacy: A survivorship policy guarantees a death benefit for a chosen charity after the passing of both policyholders.
Applicants’ age and health are considered during the underwriting process for joint life insurance. However, a survivorship policy may allow an older or less healthy spouse to qualify for coverage, as the insurer anticipates only one payout upon the death of the second, likely younger or more nutritious, individual.
Given its specialized nature, obtaining quotes and applying for a second-to-die policy typically requires assistance from a life insurance agent or broker.
What is Survivorship Life Insurance?
Survivorship life insurance, or second-to-die life insurance, covers two individuals under a single policy. It only pays out a death benefit when both policyholders have passed away. This differs from first-to-die life insurance, which pays out after the first spouse’s death.
According to Dustin Giannangelo, CEO of Fusion Wealth Management in Phoenix, survivorship life insurance has historically been used as an estate planning tool by affluent couples to mitigate future tax liabilities for their heirs. However, it can also be a valuable strategy for families beyond the wealthy.
Giannangelo explains that combining two individuals on one life policy often allows for a more substantial death benefit at a lower cost than purchasing two individual policies. Like other life insurance policies, the death benefit is typically paid tax-free to beneficiaries.
Different Types of Survivorship Life Insurance
Survivorship life insurance commonly falls into two categories of permanent life insurance:
Whole life insurance: Offering guaranteed premiums, cash value, and death benefits, whole life insurance is the most straightforward form of permanent life insurance.
Universal life insurance: This type of policy may include a cash value component that allows policyholders to access funds while alive. The risk and potential upside of universal life insurance policies vary, requiring consideration of desired risk tolerance when selecting a policy.
Pricing of Survivorship Life Insurance
Survivorship life insurance policies often cost less than purchasing two separate policies due to lower risk for insurers, with only one payout involved. Additionally, underwriting processes may be less stringent, focusing primarily on the younger and healthier individual likely to be the “second to die.”
According to Greg Klingler, Chief Operating Officer and Vice President of Wealth Management for the Government Employees’ Benefit Association (GEBA), pricing is influenced by the insurer’s estimation of the longevity of the last surviving person. Even if one party might be considered uninsurable for individual insurance, adding them to a second-to-die policy could increase the overall benefit for the couple. Statistically, an uninsurable individual may have a lengthy life, which is factored into the pricing of second-to-die policies.
When considering survivorship life insurance, it’s advisable to consult with a financial advisor who can help you select the appropriate policy for your overall financial plan.
Is Survivorship Life Insurance the Right Choice for You?
In estate planning, survivorship life insurance emerges as a valuable resource for certain families. Giannangelo recommends that couples contemplating life insurance consider the following inquiries:
- Will your heirs face estate taxes upon your demise?
- How will you transfer ownership interest in a family business to involved and uninvolved children?
- Do you have a child with special needs requiring lifelong financial support?
- Are you seeking to leave a lasting legacy for your family or a charitable cause?
Survivorship life insurance can offer solutions to these scenarios.
“When es”ate taxes pose challenges for my clients, a survivorship life policy can serve as a pivotal strategy to generate liquid assets, thereby mitigating the impact of estate taxes on their heirs,” he said.
Estate taxes can substantially impact your family following the passing of the last surviving spouse. These taxes apply to assets surpassing the federal estate tax exemption threshold, which stood at $12.06 million per individual in 2022.
Estate taxes could deplete heirs’ wealth significantly. However, a life insurance policy can provide the necessary funds, sparing your family from liquidating assets to meet tax obligations.
“Given the constant evolution” of tax laws, consulting with your tax and legal advisors is crucial,” Giannangelo advises.
Furthermore, Giannangelo stresses the importance of ensuring that the life insurance payout remains separate from the family’s taxable estate. “family’s this, we called “orate with an attorney to establish an Irrevocable Life Insurance Trust (ILIT). The trust assumes ownership of the life policy, while estate heirs are granted customary rights associated with a family trust,” he elaborates. “Since the” trust is irrevocable, the death proceeds are excluded from the estate for estate tax purposes.”
For parents of a child w “with special needs, a survivorship life insurance policy can establish a trust to sustain financial security throughout the child’s lifetime.
“It’s vichild’sengage an a”It’sey specializing in Special Needs Trusts to safeguard the child’s Medicaid eligibilichild’sother government benefits,” Giannangelo advises.
How”Does Survivorship Life Insurance Operate?
Survivorship life insurance functions by naming two individuals as the insured parties, making it a joint venture rather than individual coverage. Consequently, the death benefit is only disbursed upon the demise of both individuals covered by the policy. This structural aspect allows for the provision of inheritance for dependents or the creation of a lump sum donation to a chosen cause if desired. Typically, these policies are structured as either whole or universal life policies, designed to provide coverage throughout the policyholders’ lifetimes and policyholders’ lives, which have a wthwithration date. As a result, they can accumulate cash value over time, and policyholders may borrow against this value.
It’s important to note that sIt’s the policy does not pay out upon the death of the first insured individual, expenses such as funeral or burial costs would need to be covered by the surviving individual or through another type of life insurance policy. In such circumstances, drawing upon the death benefit is not an option. Additionally, qualifying for a survivorship policy typically entails both individuals undergoing a medical examination. While this doesn’t necessarily exclude cases where one individual has a medical condition, it’s a factor to consider.
Frequently Asked Question
What is survivorship life insurance?
Survivorship life insurance, or life insurance, covers two individuals under a single policy and pays out a death benefit only after both policyholders have passed away.
How does survivorship life insurance work?
With survivorship life insurance, the death benefit is paid out upon the death of the second insured individual. This type of policy is often used in estate planning to provide liquidity for estate taxes or to leave a legacy for beneficiaries or charitable causes.
What are the benefits of survivorship life insurance?
Survivorship life insurance can provide a larger deatmore considerableonsiderablefit at a lower cost than purchasing two separate policies. It also offers flexibility in estate planning and can be used to fund trusts for special needs dependents or charitable donations.
What types of survivorship life insurance are available?
Survivorship life insurance typically includes permanent life insurance, such as whole life or universal life policies. These policies offer guaranteed premiums, cash value accumulation, and lifetime coverage.
Who should consider survivorship life insurance?
Survivorship life insurance is often suitable for married couples looking to provide financial security for their heirs, mitigate estate taxes, or leave a charitable legacy. It may also benefit couples with special needs dependents or complex estate planning needs.
Conclusion
Survivorship life insurance, or second-to-die life insurance, presents a valuable option for couples seeking to safeguard their financial legacy and address estate planning concerns. By covering two individuals under a single policy and paying out a death benefit only after both have passed away, survivorship life insurance offers benefits such as cost-effectiveness, flexibility in estate planning, and the ability to provide for special needs dependents or charitable causes. With various types of permanent life insurance available, such as whole life or universal life policies, couples can tailor their coverage to meet their specific needs and objectives.