If you’re interested in leaving a legacy or providing financially for your beneficiaries, a survivorship life insurance policy may be a good option for you. A survivorship life policy insures you and another individual (often a spouse) in a single policy that pays a death benefit after both of you pass away. You can use a survivorship life insurance policy to help with estate and legacy planning, business continuity planning, charitable giving or supporting a dependent needing lifelong care.
This article explains the basics of survivorship life insurance and various purposes that can benefit you and your loved ones.
What is survivorship life insurance?
Survivorship life insurance is a type of joint life insurance that covers two individuals under one policy and pays out a benefit after both policyholders have died. For this reason, survivorship life insurance is also called second-to-die life insurance.
How does survivorship life insurance work?
Survivorship life insurance works differently than other joint life insurance policies because no benefit is paid until the death of the second insured. To keep the policy in force, the survivor must continue to pay the regularly scheduled premiums. Upon the death of the surviving individual, named beneficiaries in the life insurance contract receive a death benefit.
For example, Joe and Maggie are a married couple who want to preserve their estate and make sure their beneficiaries are protected from financial burdens. They can set up a survivorship life insurance policy that pays a benefit after they both pass away. Their beneficiaries can use this benefit to help pay estate taxes and other settlement costs.
How can survivorship life insurance be used?
Because the death benefit is paid out only after both insureds have died, there are specific purposes that survivorship life insurance is used for, such as:
- Paying estate taxes. When the second spouse dies, the death benefit that the named beneficiary(ies) receives can be used to pay any outstanding estate taxes. Leaving funds to your heirs by way of a survivorship life insurance policy can help ensure they won’t have to liquidate assets to pay a tax bill.
- Caring for a child with special needs. Do you have a child in your life who may require a lifetime of special needs care? The death benefit from a survivorship life insurance policy can provide the necessary money to help fund the third-party care that the child may now require.
- Leaving a legacy. Have you been making a lifetime of donations to charitable organizations that mean a lot to you? The proceeds from a survivorship life insurance policy can leave a legacy in your name to causes that you want to support even after you’re gone.
What are the pros of survivorship life insurance?
- Cost: Survivorship life insurance can be a less expensive option than buying two separate life insurance policies.
- Estate preservation: A survivorship life policy can help offset estate taxes that come due after the second insured passes away.
- Potential cash value: Survivorship life insurance is often issued as a permanent whole or universal life policy that has the potential to accumulate cash value.
- Death benefit: A survivorship life insurance policy provides a single death benefit for beneficiaries.
What are the cons of survivorship life insurance?
- Death benefit: Survivorship life insurance does not pay a death benefit until after the second policyholder dies. The surviving individual will not receive financial support from this type of policy.
- Divorce: A survivorship life policy requires the consent of both policyholders to make changes. Modifying or canceling a policy can be challenging if the policyholders divorce.
What are the different types of survivorship life insurance?
Before you consider using life insurance as part of your estate plan, it's important to understand the types of survivorship life insurance policies commonly used for this purpose.
Whole life insurance offers lifetime protection and a guaranteed death benefit with cash value growth at a fixed rate as long as required premiums are maintained.
Universal life insurance offers lifetime protection and a guaranteed death benefit, with options for growth based on accumulation objectives and risk tolerance when required premium payments are maintained.
Who should consider survivorship life insurance?
There are several situations where you may want to consider a survivorship life policy. If you have a medical condition that disqualifies you from an individual life insurance policy, you may still be able to qualify for a joint policy if the second individual is healthy. If you plan to leave a sizeable estate to beneficiaries, your survivorship life insurance can be a helpful addition to your estate planning.
Frequently asked questions about survivorship life insurance
A survivorship life insurance policy usually covers how many lives?
Survivorship life insurance insures two people in a single policy. Most commonly, married couples choose this type of life insurance, but it can also benefit business partners or people with joint financial interests.
How are survivorship life insurance policies helpful in estate planning?
Because a survivorship life insurance policy pays a death benefit after the second insured dies, beneficiaries can use the money to help offset estate taxes and cover other settlement costs.
What is the difference between joint life and survivorship life insurance?
Joint life insurance is a general term to describe a life insurance policy that covers two lives. Survivorship life insurance is one type of joint life insurance.
Considering if survivorship life insurance is right for you
Leaving a legacy and protecting your loved ones is most likely a priority as you plan for the future. Contact your financial professional to determine if survivorship life insurance fits into your legacy and estate planning goals.
Consult with your legal or tax advisor regarding your individual situation before making any tax-related decisions.
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