When it comes to life insurance you have many choices - and with good reason. After all, life insurance isn't a one-size-fits-all product and you need to be able to select the right coverage based on your individual needs. And while you may have a handle on the more common types of policies such as term and whole life, you may not be aware of the benefits afforded by the less traditional types of life insurance policies such as survivorship life.
As part of Protective Life's ongoing commitment to life insurance education, this article explains the basics of survivorship life insurance and a few different purposes for which it can be used to benefit you and those you love.
What is survivorship life insurance?Survivorship life insurance differs in that it is a policy that is written on two lives. However, both insureds must die before a death benefit is paid - in other words, only after the death of the second insured. For this reason, survivorship life insurance is often referred to as second-to-die life insurance.
How does survivorship life insurance work?
When one of the insured dies, no benefit is paid. However, to keep the policy inforce, the survivor must continue to pay the regularly scheduled premiums. In the future and upon the death of the second insured, the benefit will be paid out to the named beneficiaries in life insurance contract.
How is it used?
Because the death benefit is paid out only after both insureds have died, there are very specific purposes that survivorship life insurance is typically used for that may include:
- Paying estate taxes — When the second spouse dies, the death benefit that the named beneficiary(ies) receive 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 that assets won't have to be liquidated in order to pay a tax bill.
- Caring for a special needs child — Do you and your spouse have a child in your life who may require a lifetime of special needs care? While a surviving spouse can continue to provide care even after the other spouse has died, what will happen when both of you are gone? 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 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.
Second-to-die life insurance
Second-to-die life is often more affordable because you're purchasing a single policy instead of two separate policies and because both policyholders must die before a benefit is paid. Traditionally, it is issued as a permanent* policy (whole or universal life).
Universal and variable universal life insurance
Universal and variable universal life insurance are sometimes used in survivorship estate planning. As permanent policies, they afford the flexibility to vary the amount or timing of premium payments, and the death benefit may be adjusted up or down (in accordance with the plan limits) without having to purchase a new or separate policy. And because these policies can grow in value, they allow you to build an estate, not just insulate it from taxes. It is important to note that variable life growth is based on the investment performance of the selected investment funds inside the policy.
This article presents just a few of the many uses and benefits of owning a survivorship life insurance policy. If you're not sure if this type of policy is right for you, give us a call. At Protective, we've got life insurance specialists standing by to answer any questions that you may have and can help you determine if survivorship life insurance is right for you.
Please consult with your legal or tax advisor regarding your individual situation before making any tax-related decisions.