Survivorship Life Insurance

For executives and other high net worth individuals, an emerging voluntary benefit addition is survivorship life insurance.

Survivorship life insurance, or “second to die” insurance, is a policy that insures the lives of two people. The death benefit is not rewarded to the beneficiary until after the second insured individual passes. The reason a survivorship life insurance policy doesn’t pay until the second person dies is that it is designed to pay or assist paying for estate taxes. Estate taxes can be delayed until both spouses die. Generally, on second-to-die policies, the costs are actually cheaper because the carrier is not paying a claim or a death benefit until two people have died; therefore less risk exists for the insurance carrier.

Survivorship policies can be written in the form of a whole life, universal life or variable universal life contract, an indexed universal life policy or term insurance. Term life insurance is not popular among enrollees, since it’s usually not as cost-effective to buy two term policies on two different people. In fact, a survivorship life insurance policy typically is half the cost of two individual policies.

Survivorship policies are a good choice for individuals in their late 60s and older, but are less attractive for younger people, since after a few decades the policy will be replaced with a new product.

Not just for married couples

Although the individuals buying survivorship life insurance typically are married couples, it is not uncommon to see others, including business associates, purchasing the policies.

With second to die, you can have different combinations as long as there is an insurable interest, for example, two business owners, grandparents and grandchild, or parent and child.

While there are many reasons why individuals might want to invest in second-to-die life insurance, another particularly important reason is to provide for a special needs child or adult that is dependent on the insurers.

Federal estate, gift taxes

Employers need to make sure the policies are structured properly so policyholders can avoid federal estate tax.

When the federal estate was triggered at $1 million or greater in assets, this was an often-used tool to help provide liquidity to the estate in order to pay federal estate taxes. Recently, the federal estate tax was modified to only come into effect on estates larger than $5 million [each] for a married couple.

Typically, if an individual wants to leave a legacy, the insurance policy is placed in an irrevocable life insurance trust so it is out of the estate of the insured; it can still be funded by gifts from the parents, as an example, but the entire death benefit proceeds will pass tax free to the beneficiaries.

Advantages of survivorship policies
Why do married couples choose to buy survivorship policies?

  1. Survivorship policies are cheaper than individually owned policies because the insurance company has to pay off the death benefit only once.
  2. It is a great way to get insurance for a spouse who has health complications because the underwriting procedure is not as stringent as in the case of other permanent or term life policies. Since the combined life expectancy is high, the focus is usually on the healthier spouse.
  3. Wealthy couples opt for a survivorship policy as an important tool in estate planning because the cash benefit from it can be worked out to offset estate taxes.
  4. A survivorship policy executed through a life insurance trust is a convenient way to avoid federal tax, as explained earlier in this article.
  5. A trust-survivorship policy combination can be useful in other cases as well. For instance, when a family has children with special needs, this is not just a way to avoid tax, but also to provide for the child keeping in mind that they will be disqualified from federal and state assistance if they are the recipients of more than $2000 through an inheritance. Another instance is when the death benefits are intended for donations to charities. When disbursed by a trust, they bypass heavy estate taxes and more money can be made available to a worthy cause.
  6. Estate taxes can be deferred until the second spouse’s death.
  7. Large inheritors of the insured’s wealth can use the death benefits of a survivorship policy to pay off estate taxes, gift taxes, etc.
  8. When the estate consists of hard assets, it is difficult for the beneficiaries to pay off taxes without resorting to a distress sale. The proceeds of a survivorship policy will help beneficiaries avoid this situation by providing them with liquid cash for these disbursements.

More about survivorship policies

  • A divorce could complicate a survivorship policy. Your insurance agency will be able to offer you a rider option in the case of a divorce.
  • Since death benefits are paid out only on the second spouse’s death, make sure that you take another permanent or term life insurance policy to cover the surviving spouse.
  • A survivorship policy is not to be confused with a joint life policy. In the case of a joint life policy, the death benefit is paid out after one of the insured dies, while in the case of survivorship policies the death benefit is given only after the second spouse dies.