What Is A Survivorship Life Insurance Policy?

The goal of life insurance is often to protect those who will need financial support after you pass away. Couples often buy two separate policies, but there’s another option called survivorship life insurance that insures two people under one policy.

Survivorship life insurance isn’t for everyone, but it could be a solution if you want to leave funds for loved ones after both you and the other person on the policy (often a spouse) die.

What Is Survivorship Life Insurance?

Survivorship life insurance, also called second-to-die life insurance, covers two people under one policy. It pays out a death benefit only when both have died. This is different from the other type of joint life insurance policy, which is called first-to-die life insurance and pays out after the first spouse dies.

“Historically, survivorship life insurance has been an estate planning tool used by affluent couples looking to dampen future tax liabilities for their heirs,” says Dustin Giannangelo, CEO of Fusion Wealth Management in Phoenix. “However, it could be a useful strategy for many different types of families, not just the wealthy.”

Since a survivorship life insurance policy combines two individuals on one life policy, you can typically get a much more significant death benefit at a lower cost than by buying two individual life insurance policies, he says. As with other life insurance policies, the death benefit is paid tax-free to your beneficiaries.

What Are the Different Types of Survivorship Life Insurance?

Survivorship life insurance is typically a form of permanent life insurance such as:

• Whole life insurance: A whole life insurance policy generally has guaranteed premiums, cash value and death benefits, which makes it the simplest form of permanent life insurance.
• Universal life insurance: A universal life insurance policy may have a cash value component that lets you tap into money while you’re alive. Universal life insurance policies vary based on risk and potential upside, so you want to factor in how much risk you want to take on when choosing a universal policy.

How Is Survivorship Life Insurance Priced?

Survivorship life insurance policies can cost less than buying two separate policies because the risk for the insurer is lower. There’s only one payout with a survivorship policy.

And the underwriting processes could be a bit less stringent. The underwriter will usually focus on the younger and/or healthier of the two applying for the policy because that person will likely be the “second to die.”

“Generally, price is determined by an insurance company’s perception as to how long the last surviving person will live. Ideally, both insureds are in good health, but even if one party would be considered uninsurable for individual insurance, we’ve seen that adding this person to a second-to-die policy will increase the overall benefit to the couple,” says Greg Klingler, chief operating officer and vice president of wealth management for the Government Employees’ Benefit Association (GEBA). “Statistically, it is possible that an uninsurable person may enjoy a lengthy life and this is priced into a second-to-die policy.”

If you’re considering a survivorship life insurance policy, make sure you’re working with a financial advisor who can help you find the right life insurance for your overall financial plan.

Pros and Cons of a Survivorship Life Policy

Much like any type of life insurance, a survivorship life policy has its pluses and minuses.

Pros of survivorship life insurance

• You can get more coverage than you would individually
• Often less expensive than buying two life insurance policies
• Tax advantages for estate planning
• Inheritance for your loved ones
• Policyholders can likely tap into the policy’s cash value while still alive
• Can guarantee that a loved one with permanent care needs is helped after you’re gone

Cons of survivorship life insurance

• Surviving partner gets no death benefit when the first person on the policy dies
• Divorce can complicate a second-to-die policy

Is Survivorship Life Insurance Right For You?

When it comes to estate planning, survivorship life insurance can be a valuable tool for some families. Giannangelo suggests that couples shopping for life insurance consider these questions:

• When you die, will your heirs have to pay estate taxes?
• If you own a family business, do you know how you’ll leave ownership interest to your kids who are involved and children who aren’t?
• Do you have a special needs child who will need lifelong financial support?
• Are you looking to leave a legacy behind for your family or a charity?

Survivorship life insurance can be a solution to these situations.

“When estate taxes are a problem for one of my clients, a survivorship life policy could be a crucial strategy to create liquid monies to help minimize the impact of estate taxes to their heirs,” he says.

Estate taxes can wallop your family after the death of the last surviving spouse. The tax is applied to any assets that exceed the federal estate tax exemption amount. For 2022, that’s $12.06 million per individual.

Paying an estate tax will mean a significant loss of wealth to heirs. The life insurance policy can provide those funds, so your family doesn’t have to sell off assets to pay estate taxes.

“Tax laws are constantly changing, so it’s essential to speak with your tax and legal team,” cautions Giannangelo.

Giannangelo also recommends making sure that the life insurance payout itself doesn’t become part of a family’s taxable estate. “For this reason, we will work with an attorney to establish an Irrevocable Life Insurance Trust or ILIT. The trust owns the life policy, and the heirs of the estate are given typical rights related to a family trust,” he explains. “Since the trust is irrevocable, the death proceeds are not included in the estate for estate tax purposes.”

For parents of a special needs child, a survivorship life insurance policy can fund a trust that will provide financial security throughout the child’s life.

“It’s imperative you enlist the services of an attorney that specializes in Special Needs Trusts to make sure you safeguard the child’s eligibility for Medicaid and other government programs,” advises Giannangelo.