Married couples have the option of buying individual life insurance policies or a joint policy known as survivorship or second-to-die life insurance.
Although in most cases, an individual policy may be more appropriate, there are circumstances when survivorship life insurance is the better choice. Most people know what survivorship life insurance is, but are unsure of when, why, and how this type of life insurance is most appropriate.
What is Survivorship Life Insurance?
Survivorship life insurance is a joint policy that covers multiple people and designed to pay the death benefit when the last living insured person dies. In most cases, the policy is set up to cover a married couple and the death benefit is paid when the second spouse dies, hence the name second-to-die.
Although there are several situations when a survivorship policy will provide the best life insurance solution, couples who may be considering a survivorship policy should speak with an insurance professional who has experience with this product. Although survivorship life insurance is commonly used in estate planning, there are other circumstances where it may be a better choice than traditional individual insurance coverage.
When is Survivorship Life Insurance the Best Solution?
There are several scenarios where survivorship life insurance will be the best solution for a married couple. As we mentioned earlier, most policies are used for estate planning purposes but survivorship life insurance is also appropriate when there is a special needs child in the household, or when one of the spouses is unable to qualify for life insurance because of health issues.
If a married couple’s estate will exceed the exemption amount allowed by the federal government for estate tax liability ($22.8 million for 2019), the heirs would be charged an estate tax on the value that exceeds the exemption for that year. This scenario typically forces the heirs to liquidate a portion of their inheritance in order to satisfy the tax bill from the IRS.
Rather than force their heirs to pay taxes on the estate, a wealthy couple can purchase survivorship life insurance that covers each spouse but only pays the death benefit after both spouses have died. Most estate planning professionals will recommend that the insureds place their policy in an Irrevocable Life Insurance Trust so that the death benefit and any cash value in the insurance policy will not be considered part of the inherited estate.
When the second insured person dies, the insurance company will pay the death benefit to the trust which will then distribute the funds according to the language in the trust thereby providing the funds the heirs would need to pay the estate taxes (both federal and state), probate costs, and legal fees.
Care for a Surviving Child with Special Needs
For couples who have one or more special needs children in the household, a survivorship life insurance policy will provide the funds needed for a third party to care for the special needs person for the rest of their life.
If one of the spouses dies, the surviving spouse will typically care for the surviving special needs child and will also have the peace of mind knowing that the life insurance will cover the cost of the child’s care when the worse thing happens.
In cases where a special needs child or children are receiving benefits and services through government programs, the special needs child may lose some or all of those benefits if they are the beneficiary of a large life insurance policy. In these cases, the couple purchasing the life insurance should consider placing the insurance policy is a Special Needs Trust so that the death benefit or cash in the policy is not considered “countable” for the purpose of qualifying for government programs such as Medicaid or Supplemental Social Security Income.
We recommend that parents of special needs children visit the Special Needs Alliance website for more information about providing for special needs children.
When one Spouse has difficulty Getting Life Insurance because of Health Issues
Often times, one of the spouses may have difficulty purchasing individual life insurance because of health issues. There are “guaranteed issue” life insurance policies that can be purchased to overcome this but this kind of policy typically has a very low death benefit.
Most insurance companies that offer survivorship life insurance will offer coverage to both spouses even when one of them wouldn’t ordinarily qualify for an individual policy. As long as one of the applicants is in good health, the insurer will cover both applicants since the policy will not pay a death benefit until both insureds have died.
If after the death of one insured person, the surviving insured needs financial help, they can borrow money against the policy’s cash value without being required to pay it back. Any outstanding loans will be deducted from the death benefit before being paid to the beneficiary listed on the policy.
Why Survivorship Life Insurance may not be the Best Choice
Certainly, a survivorship life insurance is a good solution under certain circumstances but there are some drawbacks that should be considered and discussed with an insurance professional.
- The death benefit will not be paid out until both insured persons have died. This means that a second-to-die insurance policy is not a financial solution to replace your income for your spouse.
- Marriages do not always last forever. If a married couple covered under a survivorship policy decides to split and get divorced, the policy is still in place and the premiums will need to be paid. Some companies do offer a rider known as the Policy Split Option that allows the insureds to exchange the policy for two individual policies as long as the option is acted upon within the time limit specified.
- If the couple’s intentions are to have a survivorship policy in an Irrevocable Life Insurance Trust, it can be difficult or even impossible to access the cash value that has accumulated in the policy.
How to find the Best Deal and Good Advice
What your intentions are plays the largest part in deciding which type of life insurance you should purchase. To find the best deal (value) and to get sound advice regarding your circumstances, speak with insurance professionals that have significant experience dealing with estate planning and children with special needs planning.
InsuranceQuotes2Day, an independent insurance agency, has experienced and reputable insurance professionals who can offer solid advice and shop your insurance needs with most of the highest-rated insurance carriers who offer survivorship life insurance.
We encourage you to call us at 1-800-712-8519 during normal business hours or contact us through our website at your convenience.