Last updated Oct. 6, 2010
Imagine a life insurance policy that doesn’t necessarily pay off when you die. Survivorship life insurance fits that description, and might be a worthwhile purchase for people whose heirs will have to pay hefty estate taxes.
A survivorship life insurance policy, or second-to-die life, as it used to be called, insures two lives — usually a husband and wife. Unlike traditional life insurance, the death benefit isn’t paid out until the second insured person dies.
Usually, the death benefit from a survivorship life insurance policy is intended to pay federal estate taxes and other estate-settlement costs owed after both spouses pass away. The product was developed in the early 1980s in response to a law that enables married couples to postpone federal estate taxes until both spouses pass away.
Under federal tax law, there is a marital deduction permitting you to leave an unlimited amount of assets to your surviving spouse. If you leave all your worldly possessions to your husband or wife, no federal estate taxes are owed at the time of your death. Those assets then become part of the estate of the spouse and might be taxed when the surviving spouse eventually dies, assuming he or she hasn’t remarried. The death benefit from a life insurance policy could help pay those taxes.
The survivorship life insurance sales pitch
Agents who sell survivorship life insurance often point out that your beneficiaries can pay estate taxes with the proceeds of your policy, so they won’t be forced to sell your house quickly or liquidate assets to pay an estate tax bill. Furthermore, when you buy the policy, you’ll pay less than the estate taxes will cost.
Sometimes, a life insurance agent and the policyholders’ lawyers will construct a financial plan reducing the tax burden of wealthy individuals by creating trusts and using survivorship life insurance as part of the estate-planning strategy.
Advantages of survivorship life insurance policies
- Less expensive. Survivorship life insurance is usually less expensive per thousand dollars of death benefits than traditional single-insured life insurance. In the case of survivorship policies, the premium is based upon the joint life expectancy of the insureds. Since the insurance company owes nothing until both insureds die, the premium will be significantly cheaper than buying separate policies for both people.
- Easier to buy. It’s easier to qualify for a survivorship life policy than for single insured life insurance. Since both policyholders must die before the benefit is paid, the insurance company is less concerned that one of them might not be in good health. Companies are often willing to write the policy even if one of the customers is “uninsurable” by traditional life insurance standards. Of course, each insurance company will have a different definition of “uninsurable.”
- Builds your estate. In some cases, survivorship life insurance is marketed as a way to build an estate, not just insulate it from taxes. Like traditional life insurance, the death benefit of a survivorship life policy can ensure that your beneficiaries receive a minimum amount of money, even if you spend every dime during your lifetime.
- Preserves your estate. A survivorship life insurance policy appeals to individuals who feel strongly about preserving their assets for heirs. They buy a survivorship policy so their estate transfers intact to their heirs, with the life insurance benefit used for paying the taxes. In addition, your state may also impose inheritance or estate taxes.
- Variable life insurance policies let you play the market. Survivorship life insurance policies aren’t limited to whole life insurance policies. Survivorship policies are available as variable universal life policies. This type of policy lets you invest your premiums in a separate account whose value will fluctuate based on the performance of the market.
There may be other reasons to purchase survivorship life insurance. For example, parents with special needs children could consider survivorship life policies to provide for those children after both parents have died.
Questions to ask before you buy
With any type of survivorship life insurance, find out how the policy would be affected by a divorce or a change in estate tax laws. Some life insurance companies offer a rider, without extra charge, that permits you to split the policy into two single-insured policies in certain circumstances.
If you’re considering purchasing a survivorship life insurance policy, consider consulting an attorney who specializes in estate planning.