Survivorship Life Insurance

Heidi Mertlich Heidi Mertlich Posted in Types
Last updated on April 5, 2019

Salt and Pepper. Pen and Paper. Milk and Honey. Love and Marriage.

Some things are better together. The same can be said for purchasing life insurance, sometimes.

Survivorship life insurance, also known as second-to-die life insurance, covers multiple people and is often purchased by spouses.

It makes sense in some situations. Let’s dive in and take a look.

What Is Survivorship Life Insurance?

A survivorship life insurance policy is designed to insure two lives under one policy with one premium payment.

It’s a type of life insurance (almost always) called permanent life insurance that:

  • Typically involves spouses
  • Benefits are only paid after the second person dies
  • Is an affordable alternative to separate policies
  • Best for those interested in estate optimization, the well-being of children, business planning, education or charitable giving

Quick Guide:

survivorship life insurance

When Does Survivorship Life Insurance Make Sense?

There are five primary situations when survivorship life insurance is a good option:

1. Funds For Estate Taxes

Survivorship policies are often used as a strategy to hedge against estate fees and taxes.

The life insurance proceeds are typically passed to the beneficiaries income-tax free and provide a means to cover costs associated with a large estate.

Federal estate taxes, under current tax law, are usually not due until the second spouse dies, making survivorship policies a popular option.

When it makes sense: If you have a sizable estate that is taxable (see the IRS Estate Tax), survivorship life insurance can pay for your taxes and keep the estate size intact.

2. Special Needs Child

It’s common for parents to establish a survivorship policy if they are concerned for the well-being of their child, most often a special-needs child.

The financial cost of caring for a child with a developmental disorder is staggering.

According to the U.S. Department of Agriculture, it will take roughly $240,000 to raise a child from birth to age 18. For a special needs child, those expenses can quadruple. – Craig Guillot, The Cost Of Raising A Special Needs Child,

Further, the financial requirements for many special-needs children do not stop at age 18. Many will be unable to live independently. Parents need to financially plan for the longterm future for their child.

A quarter of U.S. households have a member with special needs. More than 8% of kids under 15 have a disability, and half of those are deemed severe. – Jeff Howe, Paying For My Special-Needs Child, Time

When it makes sense: Survivorship life insurance policies are an excellent option for parents to financially plan for their special-needs child, even after both parents have passed away.

3. Buy Sell Agreement

Business transition plans are crucial for spousal partnerships.

If you and your spouse each own a portion of a family-run business, survivorship life insurance provides a tax strategy and funds for the business to continue.

A properly established buy-sell agreement through survivorship life insurance can:

  • Provide a safeguard to maintain the integrity of the business
  • Be used to secure business succession

When it makes sense: If you and your spouse run a business, a buy sell agreement through survivorship life insurance is an intelligent option.

4. Charitable Organization

Often, life insurance proceeds provide the perfect opportunity to gift funds to your favorite charity.

Reasons survivorship life insurance works well for charitable giving:

  • Seamless and straightforward, especially if you name the charity as a beneficiary (sometimes it makes sense for the charity to own the policy, too)
  • Option to pick multiple charities
  • Depending on your estate, a charitable gift can provide an income-tax deduction and benefit estate planning

When it makes sense: Charitable giving through life insurance is a popular method of gifting money to your favorite organization(s). Depending on your estate, it can also provide tax advantages.

5. Educational Trust

Permanent survivorship policies build cash value that can be accessed to fund education.

Life insurance is not considered in financial aid calculations, a benefit if student loans and aid are being examined.

When it makes sense: Some families use survivorship policies as a vehicle to help fund their child’s education. If set up properly, a survivorship policy can be an excellent, tax-advantaged resource for funding private school or college.

Benefits Of Survivorship Life Insurance

In addition to the five situations where survivorship life insurance makes sense, benefits include:

  • Underwriting is more liberal
  • Tends to be more affordable than two separate policies
  • Can equalize inheritance amongst multiple beneficiaries
  • Replace wealth spent during a lifetime

Potential Drawbacks to Survivorship Life Insurance

Depending on your circumstances, survivorship life insurance may not be the best option.

Here’s why:

  • If one of the members of the partnership (i.e. your spouse) is substantially healthier, they could pay more compared to purchasing an individual policy
  • Survivorship policies are designed differently than term life insurance, so your needs make all the difference
    • For example, it is not set up to provide income replacement
  • Premium payments may still be due after the first person dies (although not always, depending on the premium payment structure)

Things To Consider

If any of these questions apply to you, survivorship life insurance is definitely worth looking into:

  1. Do you need funds to pay estate taxes in order to maintain the size and integrity of your estate?
  2. Is there a special-needs child in your life that will need long-term financial care?
  3. Do you run a small business with your spouse?
  4. Is there a charity that you would like to gift money to?
  5. Do you need to plan for college tuition or private education?

Bottom Line

Survivorship life insurance can make all the sense in the world depending on your needs.

There are different types of survivorship policies, each with their own features and benefits.

Really, you need to collaborate with an expert independent life insurance agent who can find the best fit for you.

It pays to shop around to see which insurer offers the best price for specific circumstances. And instead of working with a broker exclusively affiliated with a single insurer, work with an independent agent who has access to the top term insurance providers. – 

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