There are a few reliable triggers for when people start shopping for life insurance. They’re usually when people have dependents who rely on policyholders financially — things like getting married, buying a house or having children. Because the protection afforded by life insurance is so important for families, it’s common for spouses to start shopping at the same time. While most couples will get individual life insurance policies for each partner, some choose to buy a single joint life insurance policy that covers both partners at the same time.
A survivorship life insurance policy is a type of joint life policy that can simplify the life insurance shopping process for spouses and can help in cases of estate planning and providing for special needs children.
What is survivorship life insurance?
Survivorship life insurance is a type of joint life insurance. It covers multiple people, typically spouses. There are some important considerations to make when deciding what type of life insurance policy is right for you and your spouse. Some things you should take into account include:
When does survivorship life insurance pay out?
In a survivorship life policy, when does the insurer pay the death benefit if the policy is covering two different people? Survivorship policies are also known as second-to-die policies, which gives you the answer: The policy pays out if both policyholders die. This is different from first-to-die joint life insurance policies which, as the name implies, pay out after one of the policyholders dies.
What kinds of survivorship policies are there?
There are a lot of different types of life insurance. The differences in the variations are important and worth digging into, but to boil things down, there are two basic groups of life insurance. Term life insurance is straightforward: The policy lasts for a set number of years, and if you die during that time, the death benefit is paid out. Permanent life insurance comes in a lot of different forms, but it lasts for as long as you pay the premiums and has a cash value component that can realize gains or losses over time.
Joint term life insurance policies are relatively rare. Most survivorship policies are permanent. You’re more likely to find survivorship universal life insurance or survivorship variable life insurance policies. You can learn more about the differences between variable and universal life insurance (it’s essentially the manner in which the cash value grows), but know that universal policies tend to be a little more flexible, as they allow you to adjust your premium and death benefit, within limits.
Another common policy type is survivorship whole life insurance. Whole life insurance is another kind of permanent life insurance, and can be simpler than universal or variable policies.
How is survivorship life insurance different than first-to-die policies?
Besides when the death benefit pays out, there are a few key differences between first-to-die and survivorship life insurance policies that should play a role in which type shoppers pick.
Both versions of joint life insurance policies have benefits and drawbacks. For example, with a first-to-die policy, the surviving policyholder gets access to the death benefit, but then the policy is complete and there is no death benefit when the partner dies (which may be many years down the road). First-to-die policies can also be more expensive than survivorship policies.
Who needs survivorship life insurance?
You should always check with a licensed insurance agent or financial adviser to make sure you’re choosing the right type of insurance policy for your financial situation. In general, there are a few scenarios where survivorship policies are worth looking into.
It can be cheaper than individual policies
Getting two individual policies for a couple makes sense for a lot of reasons. Most notably, if you get divorced, it’s easier to go your separate ways when you aren’t sharing a life insurance policy.
But survivorship life insurance policies can sometimes be cheaper than buying two separate policies. This isn’t always the case. Since joint policies are often permanent life insurance policies, they can be more expensive than simple term life insurance policies depending on the policy details, but it’s proof that it pays to compare plans.
One spouse was declined, but the other is in good health
Having each spouse buy their own policy is a good enough plan, until one can’t get coverage because of health issues. Some survivorship policies accept spouses who have otherwise been declined (because both spouses have to die for the benefit to be paid out). If a couple wants both partners to have insurance coverage but is running into difficulty for one of them, a joint policy can be a great way to cover them under a single policy.
Survivorship policies can also be structured to help the surviving spouse. Remember, the death benefit doesn’t pay out until both policyholders have died, but one alternative is to have a policy where there’s enough cash value built up after, say, five years to borrow from the policy and pay final expenses. That way the surviving spouse can cover costs but still keeps the policy. Talk to a licensed life insurance agent to find out how you can structure your policy to meet your needs.
Provides care for special needs dependents
Caring for a special needs dependent is a full-time job. That’s why many parents choose to leave money behind in a fund for special needs children so they can be taken care of for the rest of their lives. A survivorship policy that has a cash value that grows over time is a great way to do this. Read our article to learn more about special needs trusts.
Pays for estate planning
If you want to leave money behind to heirs, or want to allow your loved ones to avoid estate taxes, survivorship life insurance is a common way to do so. Most of these policies are owned by irrevocable trusts — a common way to handle estate planning, and one that should involve a financial planner and attorney.
When looking through your options for joint life insurance, it becomes apparent that there are a lot of choices you need to make if that’s the route you want to go down. Deciding on a survivorship policy is just the beginning. Make sure you know what your alternatives are, and talk to a professional before making any decisions. After all, you’re buying life insurance for yourself and your spouse. It’s not something you want to make a mistake with.