Mrs. and Mr. X own a significant estate that they plan to leave behind as a legacy to their children. As part of their estate planning process, their financial advisor recommends they purchase survivorship life insurance.
Mrs. and Mr. Y have a son with special needs. They are worried about his financial security after they are gone. Their legal counsel puts forth the idea of survivorship life insurance.
Both the couples decide to find out more about survivorship life insurance or joint survivorship life insurance and here is what they learned.
Survivorship life insurance or joint survivorship life insurance is a life insurance policy that insures the lives of two persons, most often a married couple, instead of a single individual.
The death benefits of a survivorship life insurance policy are not paid out to the beneficiary until the surviving spouse also passes away.
For this reason, survivorship life insurance is also known as second-to-die life insurance policy.
One of the biggest reasons couples buy survivorship life insurance policy is to pay for estate taxes and other estate settlement costs. The policy makes use of the marital estate tax deduction, which allows postponing the payment all federal and most state estate taxes until the death of the surviving spouse.
At this time all taxes, which could have assumed considerable proportion by now on account of appreciation in the value of the estate, would need to be paid.
This is where joint survivorship life insurance policy comes into play. The proceeds of the policy are used by its beneficiaries to pay all the estate taxes and meet other costs, eliminating the need for liquidating part of the inherited estate.
The only caveat is that neither one of the insured couple can have ownership rights to the policy. The beneficiary of the policy has to be a third party such as the insured couple’s children or a trust.
Survivorship life insurance policy is also bought by couples who have children with special needs to secure their financial wellbeing. The proceeds from a second-to-die life insurance policy ensure that sufficient funds are available upon the death of both the parents to provide for the child they leave behind.
Advantages of Survivorship Life Insurance
The biggest advantage of survivorship life insurance policy is that premiums are generally low. Since the insurance company has to pay the benefits only after the death of the surviving insured spouse, this policy is significantly less expensive than buying two separate life insurance policies.
Another benefit of joint survivorship life insurance is that it is easier to purchase than individual life insurance policies even if one of the partners is in less than perfect health. The underlying reason is the same – since the insurance companies doesn’t owe the beneficiaries anything until both the partners pass away, they are not as concerned with one’s ill-health as they would be in case of traditional life insurance policies.
In fact, a person who has been denied a single life insurance may also get approved for a joint survivorship policy. However, this can differ from case to case as no one is auto approved for any life insurance product.
Survivorship life insurance policy is bought by wealthy individuals to conserve their estate. Estate taxes incurred at the time of surviving spouse’s death could be high and it may get difficult for the beneficiaries to arrange the money. Such a situation may force them to make a distress sell or liquidate parts of their inheritance. The proceeds from joint survivorship life insurance make sure that liquid cash is available to pay off the estate taxes, thereby preserving the left behind estate.
Limitations of Survivorship Life Insurance
But the survivorship life insurance policy is not without its limitation. First of all, the death benefits go to a third party, which means if the couple doesn’t have individual life insurance policies, then the surviving spouse has no coverage upon the death of one partner.
Second, it makes use of provisions of an existing estate tax law. If any changes were to be made to the tax law, a survivorship life insurance policy would no longer be valid.
Third, what happens in case a couple gets divorced after buying survivorship life insurance? That’s why couples are advised to ask their insurers for riders in case they were to split. One option they may be offered is to convert the joint survivorship policy into two single life insurance policies if they decide to go their separate ways.
And finally, joint survivorship life insurance policy is not recommended for small estate owners. It is usually advised if the value of your estate is at least .5 million!
