Survivorship life insurance, also known as "second-to-die" insurance, is a unique type of policy that covers two individuals under a single policy. Although policyholders are typically married, this isn’t a requirement for this type of coverage. Unlike traditional life insurance policies that pay out upon the death of the insured individual, survivorship life insurance pays a death benefit only after both individuals covered by the policy have passed away.
This distinctive feature makes survivorship life insurance an attractive option for estate planning, wealth transfer, and addressing specific financial needs that arise after the death of both insured parties. In this article, we’ll discuss the advantages and disadvantages of survivorship life insurance so you can make informed decisions about your coverage.
How does survivorship and joint life insurance work?
Survivorship life insurance covers two people on a single policy and is often utilized by couples as a means of leaving money to their children, estate planning, creating a substantial legacy, or funding care for a permanent dependent. These policies are usually permanent, such as survivorship whole life insurance or survivorship universal life insurance, which means they last the policyholders' entire lives and may accrue cash value over time. This coverage type is a strategic financial tool that can serve various purposes, from estate planning to providing for dependents, and it's essential for people to carefully consider their specific needs and goals when evaluating this type of coverage.
Advantages of Survivorship Life Insurance
While everyone has different motivations for purchasing life insurance, survivorship life insurance has many key benefits to suit different coverage needs. These include:
Estate Tax Planning: Perhaps the most significant advantage of survivorship life insurance is its effectiveness in estate tax planning. Survivorship life insurance is commonly used by couples to provide liquidity to pay estate taxes after the death of the second spouse. By paying the death benefit after the second insured passes away, the policy ensures that the couples’ loved ones have the necessary funds to settle estate tax obligations without having to liquidate assets.
Cost-Effective Coverage: Survivorship life insurance typically costs less than two individual permanent life insurance policies. This makes it an attractive option for couples who want to maximize the value of their life insurance coverage while keeping premiums more affordable.
Wealth Preservation: The death benefit from a survivorship life insurance policy can be used to preserve family wealth and protect assets. It can provide financial security for heirs, allow for the equal distribution of assets, and help maintain the family's financial stability across generations.
Insurability of Second Insured: In cases where one of the insured individuals may have health issues that make obtaining individual life insurance coverage difficult or expensive, a survivorship policy allows for coverage based on the life expectancy of both insured parties. This can be advantageous when one of the insured individuals is considered a high-risk applicant (for example, due to health conditions that may put them in a lower classification group) for individual life insurance.
Privacy and Control: Survivorship life insurance policies offer a level of privacy, as the death benefit is typically paid directly to the policy beneficiaries and does not go through probate. This can help you maintain confidentiality and control over the distribution of assets.
Disadvantages of Survivorship Life Insurance
When exploring whether survivorship life insurance is right for your needs, it’s important to consider not only the advantages but the disadvantages as well. Some cons of survivorship life insurance include:
No Immediate Payout: Survivorship life insurance policies only pay out after the death of both insured individuals. This means that beneficiaries don’t receive the death benefit until both policyholders have passed away, which may not provide immediate financial support in the event of the first insured's death.
Limited Flexibility: These policies typically lack the flexibility to change or separate coverage for each insured individual. If circumstances change, including divorce or the death of one insured, the policy may not align with the new financial needs of the surviving policyholder.
Estate Tax Considerations: While survivorship life insurance can help cover estate tax liabilities, changes in tax laws and individual circumstances can impact the effectiveness of using this type of policy for estate planning.
Cost Considerations: Depending on the circumstances, the cost of a survivorship life insurance policy may be higher than the combined cost of two separate policies, especially if one of the insured individuals is in significantly better health than the other.
Investment Component Risks: Some survivorship policies have an investment component. However, the performance of this investment component is not guaranteed and may not yield anticipated returns based on market performance.
Complexity of Need: Determining the appropriate amount of coverage and ensuring that it aligns with the financial needs of the surviving spouse or beneficiaries can be complex, especially when considering changing family dynamics and financial responsibilities.
Find the Coverage That’s Right for You and Your Family with SelectQuote
Whether you’re exploring options like survivorship insurance or you’re interested in a more traditional policy, shopping for life insurance can feel overwhelming, especially if you're also considering the needs of your spouse or life partner. Fortunately, with nearly 40 years of industry experience, SelectQuote is here to help. Our licensed insurance agents are able to compare rates from multiple trusted carriers all in one place. We’ll work with you to help you navigate all of your policy options so you find the coverage that’s the right fit for your unique needs.
