For married couples, the life insurance aspect of financial planning includes exploring both individual and joint policies. While most couples opt for purchasing two individual policies, some couples choose a joint policy.
Within the universe of joint life insurance policies, two options exist in terms of the death benefit payout. With first-to-die payouts, insurers pay an immediate death benefit to the surviving spouse. With survivorship policies, insurers only pay the death benefit to heirs after both spouses die.
While joint policies generally offer cheaper pricing than two separate policies designed for sole individuals, the payout aspect plays an outsized role in determining the economic value in the overall financial picture.
What is survivorship life insurance?
A form of joint life insurance, survivorship life insurance covers each spouse simultaneously under a single policy and then pays out only after both the policyholders die. In this way, survivorship policies differ from other joint life insurance policies that come with a first-to-die death benefit.
The first-to-die benefit acts as some income replacement for the surviving spouse. With survivorship life insurance policies, the death benefit ensures lifelong care for policyholders’ permanent dependents with specialized needs.
Most survivorship policies-—80 percent—fall under the umbrella of permanent life insurance as opposed to the rest categorized as term life insurance. Used primarily as an estate planning tool and for the benefit of policyholders’ children or permanent dependents, survivorship policies fill the role of providing coverage for payment of estate taxes as well as providing for dependents with ongoing special needs.
How do survivorship policies work?
Couples seeking life insurance coverage go through a joint underwriting process that enables insurers to determine their insurability, the rate they pay and the terms they receive in the policy. All these aspects of the policy remain unchanged with the death of the first spouse. As long as the surviving spouse continues to pay premiums on the policy, beneficiaries eventually receive the death benefit.
Most survivorship policies come under the ownership of an irrevocable trust, also known as an irrevocable life insurance trust—ILIT. Because the primary purpose of the policy centers on providing money or assets to heirs or to provide a means to pay any money owed for federal, state and income taxes, survivorship policies maximize estates and provide liquidity.
The issue of estate tax actually spawned the development of survivorship policies. Because laws allow spouses to avoid taxation as the beneficiary of a marriage partner’s property, but children or others outside the couple don’t receive the same tax-free benefit, insurers developed survivorship policies as a means of maximizing estates. In other words, the intended use of the policy comes down to applying it as a means to pay final taxes.
Implementing a survivorship policy in an estate plan calls for professional expertise from a financial planner or attorney.
Who needs a survivorship life insurance policy?
Primarily designed for individuals concerned with estate planning or those with permanent dependent responsibilities, survivorship policies sometimes also fit the bill for others in particular circumstances. Personal circumstances warranting exploration into survivorship policies include couples who:
- Find individual term policies unaffordable
- Include one spouse declined for life insurance while the other spouse maintains good health
- Need a cash value life insurance policy
While survivorship life insurance policies predominately serve the insurance needs of individuals concerned with estate planning or lifelong dependent care, the product also stretches its utility to a select demographic. Nonetheless, the benefits of a survivorship policies apply to only very specific situations that make the delayed payout of the death benefit worthwhile.
Why get survivorship life insurance?
While a somewhat unconventional life insurance product, survivorship life insurance policies offer distinct advantages for those considered a good fit according to their specific profile.
Besides establishing security for permanent dependent care, other survivorship life insurance advantages include:
- Cost: Survivorship life insurance usually costs less per thousand dollars of death benefit value than policies sold as traditional single-insured life insurance. As survivorship policy premiums center on the joint life expectancy of policyholders, insurers generally offer cheaper premiums as a tradeoff for expected time before both policyholders die
- Availability: Insurers’ concerns around poor health lessen with survivorship life insurance policies where both policyholders die before paying out the death benefit. Even in cases where one of the policyholders faces extreme health afflictions, coverage of two people spreads the risk and provides a window for insurers to accept less desirable policyholders.
- Estate building: Insurers sometimes also make the case that survivorship policies offer policyholders a path toward estate building. While much of the argument bolstering survivorship policies focuses on protecting an estate from taxes, insurers also point out that beneficiaries receive a minimum payout regardless of estate financials.
- Estate preservation: Survivorship life insurance policies offer policyholders a way to preserve their assets to heirs. With a survivorship policy in place, heirs receive an intact estate as well as the financial means to pay estate taxes and any applicable federal or state inheritance taxes.
- Investment: Survivorship life insurance policies come in both variable life and whole life varieties. With policies falling under the variable life category, policyholders invest premiums in a market account and gain the opportunity to grow the account.
|Pros of Survivorship Policies||Cons of Survivorship Policies|
|Income protection for permanent dependents
Estate building and estate preservation
|No income replacement for surviving spouse
Delayed payout of death benefit
Division of property in case of divorce
How do you get a survivorship policy?
Steps couples take in the purchase of a survivorship life insurance policy include:
- Assess: Couples taking an account of their personal situation to assess the needs of the family after one spouse dies and after both spouses die creates the framework required to determine the type of policy and the size of policy required in order to meet responsibilities.
- Ask for recommendations: Tap family and community members for any insights or recommendations for insurers.
- Seek professional guidance: Financial advisors and estate planning attorneys understand the perils, pitfalls and loopholes of various insurance products. Their expertise ensures any policies purchased by a couple provide the required coverage levels.
- Look at insurers’ customer reviews: When considering any particular insurer, looking over customer reviews provides a snapshot of the level and quality of service provided by the agency.
- Compare quotes and coverage: Once couples narrow down their policy search to just a few insurers, compare offerings in terms of premiums and coverage to find the best deal.
By taking the time to perform due diligence before buying a survivorship policy, couples achieve peace of mind. Knowing a policy serves their desires around their estate and also meets the needs of beneficiaries provides assurances that alleviate worry and anxiety.
Frequently asked questions
Are survivorship life insurance policies cheaper than individual life policies?
Yes. In many cases survivorship policies cost couples less to purchase than two individual life insurance policies. Of course, the tradeoff of the savings comes in the form of a delayed death benefit payout.
Are survivorship policies available to couples that include a spouse with health problems?
Yes. One of the more attractive features of survivorship policies includes the lack of emphasis on health status. In the eyes of insurers, the risk around providing the policy decreases with coverage of two people instead of a single individual.
What is the best life insurance company?
Besides asking friends and family for recommendations, online tools provide a solid overview of top-ranking insurers. Do research to find the best option for you.