Best Survivorship Life Insurance Guide

Best Survivorship Life Insurance Guide

A survivorship life insurance policy works differently than a first to die policy.

Also called a “last to die” policy, a survivorship policy provides a death benefit only when both insured spouses have passed.

A survivorship policy doesn’t pay a death benefit to either spouse but rather to a separate named beneficiary.

You’ll find survivorship life insurance referred to as:

  • Joint Survivor Life Insurance
  • Second-to-Die Life Insurance
  • Variable Survivorship Insurance

Survivorship life insurance policies are sometimes referred to by different names, but the structure is the same in that the policy only pays a benefit after both people insured by the policy have died. 

What is a survivorship Life Insurance Policy?

Survivorship life insurance is a form of permanent life insurance that covers two people on one policy and pays a death benefit after both people on the policy have died.

The cost for survivorship life insurance is usually lower than the cost of two individual policies.

Survivorship life insurance is a life insurance policy that insures two people and pays at the second death.

Also referred to as second-to-die life insurance, common abbreviations are SWL for survivor whole life and SUL for survivor universal life.

How does survivorship life insurance work?

Survivorship life insurance, also known as second to die life insurance, is a great product for estate planning.

Survivorship life insurance only pays the benefit to the beneficiary when all the policyholders or insured people on the policy have died. It will not pay the death benefit if only one of the insured people dies.

Survivorship life insurance is often chosen when the purpose of the insurance is to leave money to a couples’ heirs, which is why it only pays the death benefit when both spouses have died.

Another advantage of the survivorship life insurance policy is that when one spouse has died, if there is cash value built up in the policy then the surviving spouse may be able to cash in on the cash value of the policy as needed.

Is second to die life insurance a good idea?

There are many uses for a survivorship life insurance policy. Let’s look at five.

ESTATE TAXES

Life insurance is the least expensive method of providing cash for the payment of estate taxes.

Since 1981, the law allows one spouse to transfer all their property to the other spouse at death tax-free.

This is the “unlimited marital deduction.” If there is an estate tax due, it is not due until the second spouse dies.

In response, life insurance companies designed the survivorship life insurance contract.

Since the premium is lower, it is even a better solution than a policy insuring only one person.

REPLACING AN ASSET GIVEN AWAY

Charitable remainder trusts (CRTs) allow a person to sell a highly appreciated asset (stock, land, a business, etc.) without paying a capital gain tax, receive an income tax deduction and convert the asset to an income.

At their death, the asset passes to the charity, not to their heirs.

An easy way to circumvent the children’s disinheritance is to ensure mom and dad with a survivorship life insurance policy for the value of the asset given to charity.

Sometimes premiums can be entirely paid from the income from the charitable remainder trust, which is often found money if the original asset was illiquid.

The income tax deduction can be spread over six years if the asset contributed to the CRT is large enough. This is another premium source.

EVEN OUT AN INHERITANCE

A couple has three children and a family business. One of the children is active in the business and the other two have careers of their own. If the bulk of the estate is the business and the plan is to leave the business to the active child, the other two children come up short.

A second-to-die policy on mom and dad can even things out.

For example, let’s say the total estate is 6 million and the business represents 4 million.

If the parents leave the business to the active child and the remaining 2 million to the other two children and name these children the beneficiary of a 6 million dollar survivorship life policy, everything is equal.

The child actors in the business get the business worth 4 million.

The other two children inherit 1 million apiece from the balance of the estate and 3 million apiece from the survivorship life insurance policy.

POST PHONE A BUY SELL

If Joe and Bill were equal partners in a business, good planning would have them meet with their attorney and accountant, put a value on the business that each are happy with and has a buy-sell agreement drawn.

Fund the agreement with life insurance and the funds are assured for the buy-out.

However, what if Joe’s wife, Ann, is also active in the business? If Joe dies, Ann would inherit Joe’s interest and continue to work in the business as usual.

In this case, it would make sense to use a survivorship life insurance policy to ensure both Joe and Ann.

The buy-sell agreement would be worded to trigger the buy-out at the second of their deaths.

TO PAY THE INCOME TAX ON AN INHERITED QUALIFIED PLAN

This is the day of mega 401(k) plans. When a 401(k), IRA or other qualified plan is passed, for example, to the children, income tax is required upon a distribution.

Most people do not realize the large potential tax on what may be their largest asset.

Let’s look at the worst case.

If the qualified plan money is subject to the top estate tax bracket, which is currently 45% and the child is also in the top income tax bracket, currently, 35%, the amount left to the child is only a fraction of the total amount.

Note there is a deduction against income for estate taxes paid.

A good estimate of the net total percentage paid in taxes at the top brackets is 70%.

Use a survivorship life insurance policy to offset the income tax on the distributions, the estate tax or both.

There are many other uses of survivorship life insurance policies. If your situation includes any of these examples, we would recommend looking at the use of a second-to-die policy.

Survivorship Life Insurance and Special Needs Child

Your child will still have your partner to care for him or her.

Your individual life insurance policy will provide the money necessary to reduce the financial burden you leave behind.

But, parents of special needs children may need to plan financially for what happens when your child outlives both of you.

Fortunately, there is a very cost-effective way to provide the financial assistance your child will need well into adulthood – survivorship life insurance.

Also known as second-to-die life insurance, this policy is written on both parents. Since the risk is spread among two individuals, the cost of survivorship life insurance is much lower than an individual policy.

Survivorship life insurance is an affordable way to provide the financial assistance your special needs child may require in the future.

For children receiving public needs-based assistance, it is recommended survivorship life insurance be placed in a special needs trust.

The trust allows your child to continue receiving public benefits while also providing direction on how the benefits can be used.

Survivorship life insurance is a relatively simple product.

However, financial planning for special needs families can be very complex.

How much cost a survivorship Life Insurance?

Since the insurance company does not have to pay until the second person dies, the premium is lower.

The insurance company could issue a standard policy, even if one person has health issues.

In extreme cases where one person is entirely uninsurable, a policy with an acceptable premium is possible.

There are many uses for a survivorship life insurance policy.  

What is the difference between joint life and survivorship life?

Survivorship life is similar to joint life in that it insures two people for a premium based on their joint age.

However, survivorship life pays a death benefit out only on the last death, unlike joint life which pays a death benefit only on the first one.

Since the death benefit is not paid until the last insured dies, the life expectancy for the policy is based on a longer time span which allows for a lower premium than an individual or joint life policy.

Survivorship policies are popular for many situations.

Often, couples who are retired and do not rely on each other for income will buy a survivorship policy to help their children with estate taxes.

Joint and survivor policies sometimes include a spendthrift clause. The spendthrift clause prevents the beneficiary from falling prey to poor budgeting and spending the benefits too quickly.

The clause requires that the death benefit be paid out over time or in fixed installments. The beneficiary is not entitled to change the settlement option and cannot borrow or assign any of the proceeds.

The spendthrift clause is also helpful in preventing creditors of a beneficiary from taking the benefit to pay debts.

These are just some of the attributes of utilizing this form of insurance; along with proper estate planning utilizing various types of trusts. 

Couples that purchase life insurance together really have two choices: they can purchase joint life insurance (a single policy covering two people), or they can buy separate policies.

Joint life isn’t an option that most people are aware of. However, depending on the circumstances, it might be the correct choice.

Specific to joint life insurance, there’s another important difference to understand: whether the policy is a first-to-die insurance policy or a second-to-die policy—also known as a “survivorship” life insurance policy.

First-to-die life insurance

First-to-die joint life insurance acts in the same way that individual life insurance does: It is income replacement for the beneficiary when a spouse dies. With first-to-die life insurance, the benefit is paid when the first spouse dies. It’s a good option for people with significant financial responsibilities, like young children, mortgages, or anyone else who will need to make ends meet if a wage-earner dies. First-to-die life insurance lets the surviving spouse move forward by paying out a lump sum benefit.

Second-to-die life insurance

Also known as survivor or survivorship life insurance, the second-to-die life policy pays a benefit once both policyholders have died. Upon the second policyholder’s death, the benefit is paid to the beneficiary.

Second-to-die policies function best as a method for beneficiaries to pay for inheritance tax, estate taxes, or as a way for the policyholders to leave something behind for their heirs. A significant drawback of a survivor life policy is that the surviving spouse will still have to continue paying premiums after the first policyholder dies. However, if it’s a permanent policy, the cash value of the policy might help with premium payments. 

How are survivorship life insurance policies helpful?

Unlike a traditional life policy that pays benefits upon the death of an insured individual, a survivorship policy covers the lives of two people and pays benefits only when the second person dies.

Why would you want this? Well, estate planners typically use these policies to cover the estate taxes of wealthy couples.

Since the unlimited marital deduction allows assets to pass tax-free to a widow or widower, a survivorship policy delays the life insurance benefit payout until the death of the second spouse, when the infusion of cash is needed to take care of the estate taxes.

A second-to-die policy also may be useful for business partners, dual-income parents and couples who want to provide lifelong care for a special-needs child.

The purpose is always essentially the same: to provide the cash to pay anticipated estate taxes on an illiquid estate so the assets don’t have to be sold off piecemeal or at an inopportune time.

Right now, the recommendation is that if your estate is worth $5 million-plus, you better get the survivorship insurance. The estate tax is not going to go away; it’s just a question of where it’s going to land.

What are Pros and cons of second to-die life insurance? Best Survivorship Life Insurance Guide

Besides the help with estate taxes, survivorship policies typically offer these other advantages:

Favorable underwriting: Because the policy is based on two lives, underwriters use a different and more lenient mortality table than those used for individual policies. Because they’re underwriting both of you, even if one person is uninsurable, if the other person is in good health, you can usually still get the policy.

Lower premiums: Since survivorship policies usually don’t build cash value and don’t pay out until the second spouse dies, the rates are typically lower than for two comparable, more traditional life insurance policies.

Return on investment: A survivorship version of permanent, universal life, or UL, with a guaranteed death benefit may pay out the full benefit long before the insured persons have paid off the policy.

While a survivorship policy itself is more complex than a standard life insurance policy, its effectiveness depends on how well it is integrated into a comprehensive estate plan.

First of all, you want to have an irrevocable life insurance trust set up where the trust is the owner and beneficiary of the life insurance.

As the trustees, the husband and wife would gift the money to the trust to pay the premiums; currently, between the two of them, they would be able to put in $26,000 a year at the current (tax-exempt) limit.

Some couples cash out their individual whole life policies and place the accrued cash in a trust to fund a survivorship UL policy designed to cover their likely estate taxes.

Even if they have to pay some taxes on the cash value from their whole life policy, they’ll still have enough cash there to pay the premium for the new policy and still come out ahead.

You want the lowest-cost guaranteed UL product you can get.

The good news is that life insurance rates are more affordable now than in the past. That’s great! But keep in mind, your life insurance policy – of any type – will probably cost less now than if you wait for another birthday to pass for either spouse insured by the policy.

Survivorship Life Insurance and Divorce – Best Survivorship Life Insurance Guide

Often, an irrevocable life insurance trust is set up to buy the policy. That way, the trustee pays the premiums and manages the terms of the trust. You provide the funding as the grantor of the trust and can make gifts to the trust to pay the premiums. Using the trust as the owner keeps the death benefits paid from the policy out of the survivor’s estate when he or she dies and retained in the trust for the benefit of the heirs.

Keep in mind that when the first spouse dies, the surviving spouse has to be able to afford to continue paying the premiums.

Also, if a couple has a survivorship policy and gets divorced, you may want to divide it in two if the carrier allows this, with each spouse owning half of the initial face value.

Deciding whether survivorship life insurance is a beneficial estate planning vehicle for you is complicated and should be evaluated on a case-by-case basis, with the advice of an attorney.

Mintco Financial Team – Survivorship Life Insurance Quote

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