Survivorship life insurance

Because a survivorship life insurance policy covers two people and doesn’t pay out the death benefit until both parties have died, it’s not the best policy for most people. So who is this policy for?

Nupur Gambhir

Nupur Gambhir

Published August 19, 2020

KEY TAKEAWAYS

  • A majority of Americans do not have enough life insurance coverage or a long enough policy term length to adequately protect their dependents from financial hardship if they die

  • The amount of life insurance coverage you purchase should account for the income you provide, any debts and liabilities you have incurred, and end of life expenses

  • While a shorter-term length is cheaper than a longer-term length, purchasing a new policy later can result in costlier premiums or a coverage gap

  • Shopping around is the best way to find a life insurance company that gives you the best rates and coverage for your individual circumstance

For married couples shopping for life insurance, there are two options: separate or joint policies. While most couples will choose to buy individual life insurance policies for each person, some couples choose to buy a single joint life insurance policy that covers both partners at the same time.

Once a couple decides to purchase a joint life insurance policy, they need to choose between first-to-die life insurance or a survivorship life insurance policy. A survivorship life insurance policy isn’t for most people, but some people may find that it is the best life insurance policy for their particular circumstance.

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What is survivorship life insurance?

Survivorship life insurance is a type of joint life insurance that insures two people instead of one. Most joint life insurance policies are permanent life insurance policies, which last your entire life and can come with an investment component called the cash value. However, about 20% of joint life insurance policies in force are term life insurance policies, which last for a set period of time. Survivorship life insurance policies are best purchased as permanent policies because they tend to serve permanent needs.

While a first-to-die life insurance policy pays out the death benefit when the first of the two spouses passes away, a survivorship life insurance policy pays out the death benefit only after both policyholders die.

How does survivorship life insurance work?

When a couple is applying for life insurance, they’ll go through the underwriting process together to receive their policy. Nothing about the policy changes after the first spouse dies — the remaining policyholder needs to continue to pay the premiums in order for the beneficiaries to eventually receive the policy’s death benefit.

Because survivorship life insurance doesn’t pay out the death benefit until both policyholders have passed away, it’s less useful as an income replacement and is best applied when used for protecting the financial health of future generations. Usually, a survivorship life insurance policy is used to pay estate taxes, inheritance taxes, and to cover the financial needs of policyholders’ children or dependents.

Some of the advantages of a second-to-die life insurance policy include:

  • Potentially lower premiums than first-to-die policies or individual policies
  • Easier for less-healthy people to qualify for than an individual or first-to-die policy
  • Can build up cash value

These advantages, however, are only applicable to individuals with specific conditions that make a survivorship life insurance policy’s delayed death benefit worthwhile.

When should you buy a survivorship life insurance policy?

While estate planning or caring for a permanent dependent are generally the only reasons anyone should consider a survivorship life insurance policy, there are a few additional circumstances that could warrant a survivorship life insurance policy, though you’ll want to speak to a financial adviser or Policygenius agent to see ensure that it is your best option.

In general, there are only two circumstances under which you should purchase a survivorship life insurance policy:

  • Income protection for a permanent dependent
  • Estate planning

A survivorship life insurance policy may be a good policy option if:

  • You can’t afford an individual term policy
  • One spouse was declined for life insurance but the other is in good health
  • You need a cash value life insurance policy

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Supplying care for permanent dependents

If you have a child or dependent who relies on you permanently, a survivorship life insurance policy can ensure that you’re leaving money behind so they can be taken care of for the rest of their life. The policy would be funded into a special needs trust for the dependent to have some income if both parents are no longer around to support them.

Estate planning

If you want to leave money or assets behind to heirs or want to allow your loved ones to avoid federal state taxes and income taxes, survivorship life insurance is a good option. The policy’s main purpose is maximizing your estate and providing liquidity.

Most of these policies are owned by irrevocable trusts — also known as irrevocable life insurance trusts or ILIT — a common way to handle estate planning, and one that should involve a financial planner and attorney.

This particular insurance product was initially developed to aid in estate planning. By law, a spouse can leave her spouse unlimited assets without incurring federal taxes; not so for other beneficiaries. So the survivorship life policy ensures that assets eventually left to beneficiaries who are not part of the couple — like children or nieces and nephews — receive a death benefit to pay an estate tax bill.

If you can’t afford two individual policies

For the most part, purchasing a permanent life insurance policy can be five to 15 times more expensive than purchasing a term life insurance policy, but permanent survivorship life insurance policies can be less expensive than purchasing individual life insurance policies because of the delay in the death benefit payout.

If purchasing an individual policy is too costly, purchasing a second-to-die policy with your partner can ensure that your dependents will still receive financial support when you die. The remaining spouse will need to continue to make the policy premium payments for the life insurance policy to remain active.

If one spouse was declined, but the other is in good health

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.

If one of the spouses is unable to get an individual life insurance policy, specifically if they are in poor health, a survivorship life insurance policy might still be able to provide them with the coverage they need. Because both spouses have to die for the benefit to be paid out, some survivorship policies accept spouses who have otherwise been declined for a life insurance policy.

There’s a need for the cash value of life insurance policy

Survivorship policies can be structured to help the surviving spouse through the cash value of the policy. Though the death benefit won’t pay out until both policyholders have died, some permanent policies can build up a cash value that can be accessed while one of the spouses is still alive. If the policy builds enough cash value, the surviving spouse can borrow from the policy and pay final expenses or the policy premiums. This enables the surviving spouse to cover costs but still keep the policy in force.

Here is how the cash value of a survivorship life insurance policy can be utilized:

  • You can withdraw money tax-free from the cash value of your policy, though if your policy lapses any money you’ve withdrawn will be taxed as income
  • You can take out a low-interest loan that accrues interest and borrows against your policy
  • You can collect the cash value by surrendering your policy, though most of the growth in your cash value happens over two or three decades

While this may seem like an attractive option, if you’re not planning for your estate or you don’t have lifelong dependents, there are better ways to ensure the financial security of your spouse. The cash value of a life insurance policy can take decades to build and isn’t available to be immediately utilized.

Who shouldn’t get survivorship life insurance?

Most people are better off purchasing individual term life insurance policies. Joint life insurance can be difficult to split up in the event of a divorce and are only beneficial under a particular set of circumstances.

Purchasing a survivorship life insurance policy can also cause a major delay to the receipt of the life insurance death benefit to your beneficiaries, so if there will be an immediate need to replace your income after your death, you should consider purchasing an individual term life insurance policy instead. Because survivorship life insurance policies pay out only after both policyholders die, it doesn’t work well as an income replacement, which is often why people buy life insurance in the first place.

Is a survivorship life insurance policy worth it?

For people in generally good health who need life insurance to replace their income when they doe, a survivorship life insurance policy isn’t the best choice for coverage. Because survivorship life insurance won’t pay out until both spouses have passed away, purchasing a policy that might not pay out for decades could defeat the need for life insurance in the first place. If you’re buying life insurance because you want to ensure your loved ones are financially protected when you die, you should purchase a traditional term life policy instead.

But there are certain people who could find that a survivorship life insurance policy is the best fit for them. If you’re using life insurance as an estate planning tool and want to ensure your heirs will get the death benefit, then a survivorship life policy would work to your benefit. Alternatively, if you or your spouse are in poor health and can’t get an affordable policy on your own, then a survivorship life insurance policy allows you to get some coverage.

Whether or not a survivorship life insurance policy is worth it depends on individual circumstances and you should consult with a life insurance agent to determine what the options are for you.

Insurance Expert

Nupur Gambhir

Insurance Expert

Nupur Gambhir is an insurance editor at Policygenius in New York City. Previously, she has worked in marketing and business development for travel and tech. She has a B.A. in Economics from Ohio State University.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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