What Is Survivorship Life Insurance And Why You Might Need It?

Many people get regular life insurance to provide financial protection for their families in case something happens to them. But have you considered getting survivorship life insurance instead? This type of policy works a bit differently than regular life insurance and can provide unique benefits for certain situations. Here we have survivorship life insurance explained, how it works, and when it may be appropriate for your needs.

What is Survivorship Life Insurance?

Survivorship life insurance, also known as second-to-die insurance, is a policy that pays out a death benefit only when both people named on the policy have passed away. It insures two lives (usually spouses or domestic partners) with one policy.

Unlike regular life insurance that pays out when each insured individual dies, survivorship insurance pays out when the second insured individual dies. This leads to some advantages that make this type of life insurance valuable for specific estate planning and financial goals. Because the policy only pays out after both insured people have died, usually many years in the future, premiums tend to be much lower compared to two separate individual policies.

This allows the death benefit to compound long-term at a lower cost. It provides essential income or inheritance for remaining dependents after both spouse incomes expire. The structure also prevents having to tap into retirement savings prematurely if one spouse dies first. Survivorship insurance patiently waits to disburse funds until the survivor passes away when financial support is most necessary.

Why Consider Survivorship Life Insurance?

Many married couples get individual life insurance policies to provide for their spouse in the event of untimely death. However, survivorship life insurance, also known as second-to-die insurance, is another option to consider that offers unique benefits. Here’s an overview of what survivorship life insurance is and why you may want to get a policy.

Benefits:

Survivorship life insurance, or second-to-die insurance, is a policy that pays out a death benefit when the second spouse passes away. It insures both spouses under one policy.

These policies require just one premium for the coverage of two lives. The premiums are typically lower than getting two individual policies since the policy isn’t expected to pay out until both insureds have died. This makes it more affordable, especially for older couples.

Why Consider Getting a Survivorship Policy?

There are a few key reasons why married couples may opt for a survivorship life insurance policy rather than individual policies:

• It saves money on premiums compared to two separate policies, making coverage more affordable. For couples in their 50s and 60s who may face high premiums on individual policies, this can make obtaining ample coverage easier to budget for.
• For estates that may face taxes upon the second death, it provides liquid funds available exactly when they’re needed to pay estate taxes or other final expenses without surviving family members needing to sell assets on a time crunch. The payout can prevent unwanted financial burdens.
• If assets are held jointly, a survivorship policy allows the survivors to maintain control of the assets without a need for liquidation to cover any debts owed. This gives some financial protections and flexibility.
• The death benefit payout won’t be subject to probate when used directly for paying estate taxes, debts, and other final costs. This provides faster access to funds than assets tied up in probate.

The Right Amount of Coverage

Most experts recommend 10-20x your gross annual household income in total life insurance coverage when you have dependents. However, your specific amount should be based on your unique situation, goals, and needs. Common reasons to get life insurance like survivorship insurance include:

• Paying off a mortgage and debts
• Funding college savings
• Replacing lost income
• Paying estate taxes

Speak with a qualified insurance agent to review your financial situation and determine the appropriate amount and type of policy for your needs. Survivorship insurance can provide an affordable way to achieve needed coverage for couples.

Ideal Candidates for Survivorship Life Insurance

Survivorship life insurance works best for certain demographics and financial situations. The most ideal candidates include:

• Married couples in a first or second marriage
• Older couples with shared assets
• High net worth couples concerned about estate taxes
• Business partners seeking continuity for a shared business interest
• Couples where one spouse relies on the other’s income or pension

If you fall into one of these categories, a survivorship life insurance policy could make good financial sense. The key is understanding how this type of shared policy can achieve tax advantages and liquidity benefits that individual policies may not provide.

Below are some additional details on why these groups can benefit most from survivorship life insurance:

Older Couples with Shared Assets – When assets are jointly held, a survivorship policy ensures the survivor can maintain control of those assets without necessarily liquidating to cover any debts or expenses after their partner passes. This prevents unwanted financial constraints.

High Net Worth Couples – For couples with sizable estates that may risk steep taxes upon the death of the second spouse, it provides liquid funds available exactly when needed to pay estate taxes. This prevents survivors from a time-crunch sale of assets or undue financial stress.

Business Partners – When business partners or shareholders wish to fund a buy-sell agreement cheaply to ensure continuity of a shared business, these policies can provide an affordable and straightforward way to achieve that goal.

Reliance on Spouse’s Income/Pension – If one spouse relies on the income or pension of the other for ongoing living expenses, a survivorship policy can replace that lost income if the pension-earning spouse were to pass first. This protects the financial situation of the surviving dependent spouse.

Overall, survivorship life insurance is an underutilized but valuable financial tool for certain couples to mitigate tax burdens, maintain control of assets, fund business agreements, and replace lost income security. Speaking with a trusted insurance advisor can help determine if it aligns with your wealth transfer and financial goals.

Getting Survivorship Life Insurance

Survivorship life insurance policies are almost always permanent policies such as whole life or universal life insurance. This means coverage is lifelong as long as premiums keep getting paid on schedule. The policies build up cash value that remains under policy control in addition to paying out a death benefit.

Work with a knowledgeable independent insurance agent to discuss your situation. They can provide quotes based on the younger age of the two insureds and help you determine appropriate coverage amounts for your goals. Be prepared to go through detailed medical underwriting to qualify for a shared policy. Insurers will request health records and statements from doctors of both applicants before approving a policy.

While survivorship life insurance has its complexities, it can be worth exploring if your finances align with the benefits of second-to-die coverage. The agent can structure premiums and death benefits to fit your budget and adequately replace income for the period after the second spouse dies leading up to the distribution of estate assets to heirs. This funds living costs while avoiding liquidation of other assets at unfavorable tax implications or before optimal growth potential is reached. Discuss with an insurance specialist to learn more.

Leveraging Policy Cash Value

Beyond providing a death benefit, permanent survivorship policies also build up cash value that remains under owner control. Over decades, cash savings accumulate through interest crediting and dividends, without losing policy guarantees.

Some insurers allow accessing cash value through loans or partial withdrawals to supplement retirement income if needed. This convenient feature turns permanent policies into a supplemental income source later in life in addition to paying out a sizable benefit upon the second death.

Survivorship designs provide unique advantages here as well. Since the policy pays out later than individual coverage, cash value growth potential reaches optimal time horizons for conservative returns compounding tax-deferred. Taking some gains as retirement income makes sense without fully surrendering policies and losing coverage safety nets. Discussing cash value options with licensed agents ensures fully utilizing this asset.

Conclusion

Survivorship life insurance fills a unique gap for couples needing extended financial security to cover final expenses and retirement living costs all the way through the passing of the surviving spouse. It certainly complements other wealth transfer planning arrangements. Take time to project income needs past the first death and evaluate if survivorship insurance can cost-effectively deliver necessary payouts later at significantly lower premiums today. The coverage offers welcome peace of mind knowing death won’t disrupt financial life for your loved ones.