Guarding Futures: Survivorship Life Insurance Essentials

A survivorship life insurance policy, also known as a second-to-die or joint-life insurance policy, is a type of life insurance that covers the lives of two individuals (usually spouses or business partners) under a single policy. The death benefit is not paid out until both insured individuals have passed away. 

This type of policy is mainly used for estate planning and wealth transfer purposes, but it may also be useful if you have a special needs dependent or share a business with a partner. In general, however, a survivorship life policy is not going to be the best choice for most people whose main goal is to protect their loved ones financially. 

Because it’s important to get educated about all of your options, this guide breaks down exactly what a survivorship life policy entails, for which scenarios it may make sense, and some alternative life insurance options to consider.

What is a survivorship life insurance policy?

Survivorship life insurance is a type of permanent life insurance that covers the lives of two individuals (usually spouses) under a single policy. The death benefit is paid out only upon the death of the second insured individual. This type of policy is also known as second-to-die or joint-life insurance.

There are two main subtypes of survivorship life insurance:

• Survivorship Whole Life Insurance: This type provides a death benefit and has a cash value component that accumulates over time. Premiums are generally higher compared to term life insurance, but the policy remains in force as long as the premiums are paid.
• Survivorship Universal Life Insurance: Similar to whole life insurance, survivorship universal life insurance also offers a death benefit and a cash value component. However, it provides more flexibility in premium payments and death benefit amounts. Policyholders can adjust premiums and death benefits within certain limits.

One key benefit of survivorship life policies is that they are generally less expensive than two individuals getting their own insurance. This can make it an attractive option for couples looking to maximize the amount of coverage for a given premium. It might also be useful if one spouse has health conditions that are making it difficult to qualify for life insurance on their own.

Use cases for a survivorship life policy

While the vast majority of people seek life insurance to help ease the financial burden of family members in case they die – such as covering expenses, debts, and funeral costs, and replacing income – that’s usually not the main motivation for people who get survivorship life insurance. To follow are some of the situations that might warrant someone to consider a survivor life policy.

• Estate planning: Survivorship life insurance is often used as a tool for estate planning, especially in situations where there is a significant estate tax liability. For very wealthy people, such a policy allows the proceeds to be used to pay estate taxes, ensuring that heirs receive more of the estate's value.
• Legacy planning: Like other types of permanent life insurance, a survivorship life policy can be used to create a legacy or provide financial support to heirs, such as children or grandchildren, after the death of both insured individuals.
• Charitable giving: Some couples use survivorship life insurance as a way to make a charitable contribution after they both pass away. The death benefit can be directed to a charitable organization of their choice.
• Business succession: Survivorship life insurance is sometimes used as a strategic financial tool to address various business-related concerns and risks. For example, if both partners pass away, a survivorship policy can help cover the financial costs of transferring business ownership so that heirs can take over the business more seamlessly. It's essential for business partners to work closely with legal and financial professionals to structure survivorship life insurance policies appropriately. Each business situation is unique, and a tailored approach is crucial to ensuring that survivorship life insurance aligns with the partners' objectives and the overall business strategy.
• Special needs planning: A survivorship life policy can provide peace of mind for families with special needs children or dependents. It can ensure that there are funds available to provide for their care after the insured individuals die.

The downsides of survivorship life insurance

It's important to note that survivorship life insurance may not be suitable for everyone. These are a few of the key considerations to think about if you’re exploring this type of life insurance coverage:

• Payout isn’t until the second death: The death benefit is not paid out until both insured individuals have passed away. If immediate liquidity is needed upon the death of the first individual, a different type of life insurance policy may be more suitable.
• Premium payments must continue after the first death: Even after the death of the first insured, the surviving spouse must continue paying premiums to keep the policy in force. This can be a financial burden, especially if the surviving spouse is on a fixed income.
• There is limited flexibility: Survivorship life insurance policies typically have less flexibility than individual policies. Once the policy is in force, it may be challenging to make changes or adjustments.

Alternatives to survivorship life insurance

If you don’t think a survivorship life policy is the best option for you, there are other avenues to explore. Some of the main ones include:

• Term Life Insurance: A term life policy provides coverage for a specific term (usually 10, 20, or 30 years), offering a death benefit if the insured individual dies during the policy term. It is generally more affordable but does not build cash value.
• Permanent Life Insurance (Whole Life or Universal Life): These policies offer lifelong coverage and include a cash value component that can grow over time. Premiums are typically higher than term life insurance but may provide more flexibility and cash value accumulation. The main distinction with survivorship life policies is that whole life and universal life policies are for one individual.
• First-to-Die Life Insurance: Similar to survivorship life insurance because it’s a joint policy, but the difference is the death benefit is paid out upon the death of the first insured individual. 
• Estate planning strategies without insurance: Depending on your financial situation, you might explore other estate planning strategies to address tax implications, such as trusts, gifting, or other legal structures.
• Charitable planning without insurance: If charitable giving is a primary goal, there are various estate planning tools and strategies that don't involve life insurance, such as charitable trusts or foundations.

Is survivorship life insurance right for you?

Survivorship life insurance ensures that the death benefit is paid out after both insured individuals have passed away, which for some people, could be the right strategy. For many people, term life insurance is often preferred since it provides affordable coverage for a specific time period. 

It's crucial to carefully evaluate your financial objectives, risk tolerance, and overall estate planning needs before selecting any life insurance product. Consulting with a financial advisor or estate planning professional can help you make informed decisions based on your unique circumstances.