Survivorship Life Insurance
Survivorship life insurance, synonymous with second to die life insurance and dual life insurance, is a type of coverage that insures two people, typically a husband and wife, with a single policy. Unlike other policies, survivorship insurance policies do not pay benefits until the death of the last surviving policyholder. A survivorship life policy is available in two forms: survivorship whole life insurance and survivorship variable universal life insurance (SVUL). Common purposes of second to die insurance include protecting a business or heirs, leaving a legacy, and estate planning. Read on to learn how a second to die policy works and understand its advantages and disadvantages.
Functions of Survivorship Insurance
Aside from estate planning concerns, the main reason why couples purchase second to die insurance is because it is cheaper than taking out two separate policies. A survivorship life policy also can serve valuable estate-planning functions, including insulating heirs from the possibly heavy burden of estate taxes. The most common functions of survivorship life insurance include:
- Eliminating or minimizing the burden of estate taxes on the insured's heirs
- Protecting children or a business
- Providing an inheritance
- Establish a legacy, such as a gift to a charity or other non-profit organization
Advantages of Second to Die Insurance
In addition to providing the traditional death benefit of any life insurance policy, a second to die policy offers the following advantages:
- Cost-effective. A dual life insurance policy is a more economical way to insure a couple than purchasing two separate life insurance policies. Second to die life insurance is cheaper than two independent policies because the insurer only has to pay one benefit following the death of the last living policyholder.
- Relaxed underwriting requirements. Qualifying for the best survivorship life insurance premiums is far easier than doing so with traditional term life insurance or whole life insurance. Because both policyholders have to die before the death benefit is paid, the insurer is not as concerned with the possibility that one of the policyholders may not be in the best of health. In fact, some insurers will even write survivorship insurance policies if one of the policyholders would otherwise be considered "uninsurable" by the standards of other policies.
- Estate protection. A second to die policy is ideal for people who would like to insulate their wealth from estate taxes so their heirs will not have to shoulder the potentially crushing burden. With a survivorship policy, your estate will pass on to your heirs intact, as a portion of the life insurance benefit will either pay for or drastically reduce the attendant estate taxes.
- Lifetime protection. The typical second to die life insurance policy will preserve coverage for the entire lives of both policyholders, even significantly after age 100 in many cases.
- Simplicity. The purchase of second to die insurance allows you to insure the lives of two people without having to plan for or worry about who will die first. Additionally, a survivorship life policy creates an irrevocable life insurance trust, with your heirs serving as the beneficiaries. In so doing, the proceeds of the policy are excluded from your estate to minimize the taxes incurred.
Disadvantages of a Survivorship Life Policy
As with all life insurance policies, second to die policies do have a few drawbacks, including:
- Potential complications in the event of a divorce. Your policy may not be dissolvable or may become more expensive in the event you and your spouse divorce.
- Changes in estate-tax law. If avoiding estate taxes are one of the most appealing benefits of survivorship life insurance to you, research how the policy would be impacted by changes in estate-tax laws. You may have to consult with a lawyer who specializes in estate planning to discuss these stipulations.
- No benefit is paid upon the death of the first policyholder. The policy will not help pay for the death or related financial consequences of the first insured person, only the second.
- Dual life insurance is primarily intended to help couples maintain and preserve a legacy. Second to die life insurance does not provide benefits in the way most policies do, and is thus best used for estate-planning purposes.