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Using Survivorship Life Insurance in Estate Planning


Survivorship life insurance, also called second-to-die insurance, may be attractive for married couples with a high net worth. When the second policyholder passes away, the policy pays out a death benefit. So how are survivorship policies helpful in estate planning? In addition to leaving something behind for beneficiaries, this type of life insurance can yield tax benefits to the surviving spouse during their lifetime. In order to get the right life insurance that is set up correctly to use in your estate planning process, consider working with a financial advisor.

What Is Survivorship Life Insurance?

Survivorship life insurance is a type of life insurance that’s designed to cover two people. It’s a type of permanent life insurance that may be sold as whole life, variable life or universal life product. Survivorship policies can accumulate cash value, which the policyholders can withdraw or borrow against.

With a typical life insurance policy, only one person is covered. When that person passes away, the insurance company pays a death benefit to the person or persons named as beneficiaries. However, with survivorship insurance, two people are covered by the same policy. So a married couple might purchase this type of coverage and name their adult children as beneficiaries. The policy remains in effect for the duration of both policyholders’ lifetimes, as long as premiums are paid. A death benefit is only paid out after both policyholders have passed away.

How Are Survivorship Life Insurance Policies Helpful in Estate Planning?

Survivorship life insurance policies can be a useful estate planning tool for couples who have a high net worth and want to minimize taxes while creating a legacy of wealth. When a spouse dies, the surviving spouse can inherit their assets and property tax-free. Once the second spouse passes away, the estate tax would be due on assets in excess of the federal estate and gift tax exemption limit.

For 2022, the estate and gift tax exemption limit is $12.06 million or $24.12 million for married couples who file jointly. Staying under that cap is important from a tax perspective, as the upper limit for the estate tax rate is currently 40%. Survivorship policies allow the policy owners to preserve wealth by providing beneficiaries with a death benefit that can be used to pay estate taxes.

The death benefit of a survivorship policy is generally tax-free for beneficiaries. They can use this money to cover estate taxes due following the death of the second spouse, along with any administrative costs associated with probate or the administration of a trust that was created as part of your estate plan. That means that beneficiaries don’t have to rely on other assets to cover those expenses.

Since survivorship policies cover two people, they can provide a larger combined death benefit. They can also be more tax-efficient than purchasing two separate policies to cover each spouse. In terms of cost, you may pay less to buy a single policy that covers both you and your spouse versus purchasing individual coverage.

Who Is Survivorship Life Insurance Right For?

how are survivorship life insurance policies helpful in estate planning

Generally speaking, survivorship life insurance is right for couples who want to leave behind a sufficient death benefit to cover estate taxes, while preserving their current assets. Purchasing this type of policy assumes that neither spouse would need to receive a death benefit during their lifetimes when the other spouse passes away. For that reason, this type of policy may be more appropriate for wealthier couples.

Aside from the estate planning benefits of a survivorship policy, there are some specific use-cases for this kind of insurance. Here are some scenarios when a survivorship policy could make sense:

  • Special needs planning: If you have a child or other dependent with special needs, a survivorship policy can help to ensure they’re taken care of after you and the other policyholder are gone. The proceeds can be used to fund their care directly or be directed into a special needs trust.
  • Charitable giving: Survivorship policies can help you to establish or continue your philanthropic efforts when an eligible charity is named as the beneficiary. Depending on how the policy is structured, you may need to coordinate your coverage with a charitable trust to maximize tax efficiency.
  • Business succession: If you own a business, it’s important to consider what might happen to it after you and your spouse are gone. You may want your children to take over running it and a survivorship policy could provide funding to make that transition smoother. Likewise, you could use a survivorship policy to pay a death benefit to your business partner so they can keep the business going after you’re gone.

Purchasing survivorship life insurance could also make sense if one spouse has an ongoing health condition. Life insurance companies use your medical history to assess risk and it’s possible that you could be denied a policy or face much higher premiums when you have certain health issues. A survivorship policy could make it easier for you to both be covered and at an affordable price.

As mentioned, survivorship policies can accumulate cash value that policyholders can tap into during their lifetimes. For example, you might take a loan from your policy to pay for medical expenses. While loans don’t necessarily need to be repaid while you’re still living, any outstanding balances when you pass away can reduce the death benefit your beneficiaries receive.

When to Consider Another Type of Life Insurance

Understanding how survivorship life insurance policies are helpful in estate planning is key to deciding if this type of coverage is a good fit for your situation. If you’re married and you want to ensure that your spouse has sufficient assets to meet their needs, then a survivorship policy may not be the best option. Again, only the beneficiaries receive a death benefit from this type of life insurance, which excludes your spouse.

Purchasing individual life insurance policies could be the better choice when both spouses want to ensure that the other is provided for. Term life insurance may be appropriate if you think you’ll only need coverage for a certain amount of time. While it doesn’t build cash value, it’s generally cheaper than permanent life insurance coverage.

With permanent life insurance, you’re covered until you die as long as premiums are paid. You can build cash value in the policy, though the rate of return you realize can depend on which type of insurance you have. With either term or permanent life you may be able to enhance your coverage by adding riders. For example, you might add an accelerated death benefit rider if you’re concerned about developing a terminal illness.

There are also hybrid policies that are designed to cover multiple scenarios. If you think you or your spouse might need long-term care at some point, you could purchase a policy that includes both LTC coverage and a death benefit. If you need long-term care, you can use your policy to pay for it and if you don’t, then the policy will still pay out a death benefit to your beneficiaries when you pass away.

The Bottom Line

how are survivorship life insurance policies helpful in estate planning

Survivorship life insurance can be a valuable estate planning tool for wealthier couples or any couple who wants to create a legacy of wealth. Whether it’s a good solution for you can depend on your individual situation. Regardless of if you choose a survivorship policy or another type of life insurance, having coverage in place can provide you and your loved ones with peace of mind.

Tips for Estate Planning

  • Consider talking to your financial advisor about how survivorship life insurance can help with estate planning and whether it makes sense for you. If you don’t have a financial advisor yet, finding one doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • In addition to life insurance, there are other elements you may want to include in your estate plan. A last will and testament, for instance, is a fundamental part of estate planning for ensuring that your assets are distributed according to your wishes. You can also use a will to name a guardian for minor children.

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