Survivorship life insurance, sometimes called second-to-die insurance, is a unique type of policy that insures two individuals—usually spouses—under one contract. Unlike traditional joint life policies that pay benefits after the first death, survivorship policies pay the death benefit only after both insured individuals have passed away. This feature makes it a popular choice in estate planning, helping families cover estate taxes and leave a financial legacy without liquidating assets prematurely.
History and Purpose
Though life insurance has centuries of history, survivorship life insurance gained prominence with the rise of estate taxes in the 20th century. It serves as an efficient way for high-net-worth families to manage potential estate tax liabilities that arise only upon the death of both spouses. Rather than selling important assets like family homes or businesses to pay taxes, survivorship insurance provides a lump sum to beneficiaries to cover those costs.
How Survivorship Life Insurance Works
Survivorship insurance functions as a “team policy” covering two people. Both individuals are insured under a single policy, which generally costs less than two individual life insurance policies combined. The key points include:
- Two people are insured under one policy.
- Premiums tend to be lower because the payout occurs after the second death, reducing the insurer’s risk.
- The death benefit is paid to designated beneficiaries only after both insured parties have died.
- Benefits can be allocated to pay estate taxes, debts, or to fund inheritances.
For example, imagine a married couple with a substantial estate concerned about federal estate taxes, which currently apply to estates valued over $12.92 million per individual (2023 threshold, subject to change). Purchasing a survivorship life insurance policy with a death benefit tailored to cover potential estate tax liabilities helps heirs preserve assets, such as a family home or business.
Who Should Consider Survivorship Life Insurance?
- Couples, particularly married partners, looking to leave an inheritance.
- Individuals with sizable estates anticipating potential estate tax exposure.
- People seeking an affordable alternative to purchasing two separate life insurance policies.
This type of insurance is generally not suitable for single individuals or those needing life insurance proceeds immediately after the first death.
Major Benefits
- Cost Efficiency: Lower premiums than two individual policies because of the delayed payout.
- Estate Tax Planning: Provides liquidity to pay estate taxes, preventing forced asset sales.
- Legacy Planning: Guarantees that beneficiaries receive a financial inheritance.
- Simplified Policy Management: One policy insures two lives, making administration easier.
Important Considerations and Common Misconceptions
- Survivorship insurance pays only after both insured persons die, so it does not provide funds after the first death.
- It should not replace individual policies needed to cover immediate risks after the first death.
- Both insured individuals must pass medical underwriting, which can affect eligibility and costs.
- Carefully designate and review beneficiaries to ensure the death benefit is distributed as intended.
Frequently Asked Questions
Can I change beneficiaries after purchasing survivorship life insurance? Yes, most policies allow beneficiary changes, but review them regularly to reflect life changes.
Is survivorship life insurance more costly than two individual policies? Usually, it costs less because the insurer’s risk is lower, with payout only after both deaths.
Can a single person buy survivorship life insurance? No, the policy must cover two individuals.
Do survivorship policies build cash value? Certain types, like whole life or universal life survivorship policies, accumulate cash value over time.
Summary Table: Survivorship Life Insurance at a Glance
| Feature | Description |
|---|---|
| Coverage | Two people under one policy |
| Payout Timing | Upon the death of both insured individuals |
| Common Uses | Estate tax planning, legacy planning |
| Premium Cost | Generally lower than two individual policies |
| Best For | Couples with large estates or estate tax concerns |
| Not Suitable For | Singles or those needing coverage after first death |
| Policy Types Available | Whole life, universal life |
Additional Resources
For more detailed information on estate-related planning and tax strategies, consider reviewing Estate Planning and Estate Tax Planning on FinHelp.
Conclusion
Survivorship life insurance is a strategic financial tool ideal for couples who want to manage estate taxes efficiently and secure a smooth financial legacy for their beneficiaries. Because it pays out only after both insured people die, it’s important to understand how it fits into your overall insurance and estate plan. Consulting with a financial advisor or insurance professional can help determine if this policy aligns with your goals.
References
- IRS.gov – Estate and Gift Taxes
- Investopedia – Survivorship Life Insurance
- NerdWallet – What Is Survivorship Life Insurance?
- Forbes – How Survivorship Life Insurance Can Help Estate Planning
This enhanced article clarifies survivorship life insurance for FinHelp.io readers, providing valuable, actionable information for financial and estate planning.