How Are Survivorship Life Insurance Policies Helpful in Estate Planning?

A survivorship policy is a kind of life insurance that covers two individuals instead of one. These insurance policies do not pay benefits to loved ones until both of the insured individuals have passed away, which is why they are often referred to as second-to-die policies.

This kind of coverage is not as common as traditional term life insurance, but it can be beneficial in several estate planning situations.

Estate Tax Planning

The federal estate tax exemptions are generous, but estates that exceed them have a tax burden of up to 40%. A survivorship life insurance policy can provide the funds needed to help loved ones to cover estate taxes and other obligations without liquidating assets.

Providing Liquidity

Survivorship life insurance policies provide financial support to their beneficiaries when the insured individuals pass away and benefits are paid, and they also increase in value over time.

Insured individuals can access the cash value of a survivorship life insurance policy while they are still alive, but their beneficiaries will receive less if they do.

Wealth Transfer

Tax laws change over time, and the tax obligations an individual has when they draft their estate plan may become more of a financial burden as the years pass. A survivorship insurance could allow for the transfer of wealth and help a couple to ensure their heirs have the funds they need to meet future tax obligations.

Protecting Business Interests

Survivorship life insurance policies are usually purchased by married couples, but they can also be useful financial planning and succession tools for business partners.

Survivorship coverage may prevent confusion over who will take over a business after its founders pass away, and it could ensure that all interested parties are taken care of.

Charitable Giving

The beneficiaries of a survivorship life insurance company are usually the insureds’ children or other heirs, but benefits can also be donated to charity. This type of policy adds flexibility to charitable giving because its cash value can be accessed before donations are made.

Who Should Consider Survivorship Life Insurance?

Survivorship life insurance policies are most commonly purchased by married couples with sizeable estates, but they can also be useful estate planning tools for business partners and family members who share an asset like a vacation home. These policies could also be a good choice for an individual who has a serious health issues.

Survivorship life insurance polices are structured based on both of the insured parties’ life expectancies. If one insured party is seriously ill, it would not increase the premiums because benefits will not be paid until both insured parties pass away.

Comparing Survivorship Life Insurance to Individual Policies

An individual life insurance policy provides coverage for a specified period of time. Term life policies usually provide coverage for 10, 20 or 30 years. If the insured individual is still alive at the end of the coverage period, they must purchase another policy to continue coverage.

Survivorship life insurance is usually a whole life policy. This means that the insured parties continue to pay premium payments until both of them pass away. This is why survivorship life insurance policies increase in value over time.

High-net-worth Individuals

High-net worth individuals may purchase survivorship life insurance policies to provide funds to their heirs that could be used to cover costs like outstanding bills, funeral expenses and estate taxes. If a survivorship life insurance policy is not in place, some of an estate’s assets may have to be liquidated to cover these costs.

Couples With Large Estates

Couples with large and complex estates may choose to purchase survivorship life insurance coverage to reduce their tax liability, simplify their estate plans and provide future generations with financial security.

These policies could be particularly useful if a married couple owns valuable assets that cannot be divided.

Business Owners

A survivorship life insurance policy can be a valuable business succession tool. Having one of these policies in place could prevent a bitter dispute over who takes over a family business after its founders pass away. A survivorship life insurance police could make sure that nobody is left out when the ownership of a business is transferred.

Families With Special Needs Dependents

The benefits of a survivorship life insurance police may be placed into a special needs trust to meet the financial burdens of a child or other loved one who requires long-term care.

If they are structured properly, these irrevocable life insurance trusts can meet the financial needs of an individual with special needs while ensuring that they remain eligible to receive benefits from government programs like Medicaid.

Potential Drawbacks of Survivorship Life Insurance

Survivorship life insurance policies are flexible and useful estate planning tools that offer several benefits, but they do have some drawbacks. This is why it may be wise to consult with an estate planning attorney could before purchasing this policy type.

Premium Costs

Survivorship life insurance policies are costly because they provide permanent life insurance. However, one survivorship life insurance policy may have lower premiums than two separate policies.

Underwriting Challenges

Underwriting survivorship life coverage is more challenging for insurance companies because two lives are involved instead of one. This kind of coverage also tends to pay larger death benefits than traditional term life insurance.

Policy Complexity

Insurance policies that provide whole life coverage are more complex than policies that terminate after a specified amount of time. More variables are considered when they are underwritten, and their value increases over time.

Frequently Asked Questions

What Is Survivorship Life Insurance?

It is a joint life insurance policy that covers two people instead of one. It is usually purchased by married couples, and the policy pays benefits after both of the insured parties have passed away.

What Happens If One Spouse Passes Away?

If a married couple purchases a survivorship life insurance policy and one of the spouses passes away, the surviving spouse will continue to pay the premium payments. A surviving partner or surviving spouses does not receive benefits from one of these policies, but they can access its cash value.

Can the Policy Be Used for Charitable Donations?

The benefits paid by a survivorship life insurance police can be paid to any beneficiaries the insured parties designate. The beneficiaries are usually family members, but they can also be charitable causes.

How Are the Premiums Structured?

Insurance companies structure survivorship life policies based on the life expectancies of the two insured parties. This type of joint life insurance can be especially useful for a married couple when one spouse has a serious medical condition that would make purchasing a single policy difficult or impossible.