Survivorship life insurance, also known as second-to-die life insurance, is a unique type of policy that can be a valuable tool in estate planning, particularly for married couples. It differs significantly from traditional individual life insurance, so it's important to understand its specific purpose and features. Let's explore how survivorship life insurance works and its role in estate planning.

What is Survivorship Life Insurance?

Survivorship life insurance is a life insurance policy that insures two people, typically a husband and wife. The death benefit is not paid out when the first person dies, but rather only after the second person passes away.

Key Features of Survivorship Life Insurance

1. Two Insureds:

   • The policy covers two individuals (usually a married couple).

2. Death Benefit Payment:

   • The death benefit is paid to the beneficiaries only after both insureds have died.

3. Lower Premiums (Potentially):

   • Because the death benefit is paid out later, premiums for survivorship life insurance are often lower than the combined cost of two individual policies.

4. Permanent Life Insurance:

   • Survivorship life insurance policies are typically permanent life insurance, such as whole life or universal life.

5. Estate Planning Focus:

   • These policies are primarily used for estate planning purposes, rather than income replacement.

Why is Survivorship Life Insurance Used in Estate Planning?

1. Estate Tax Planning:

   • A primary use is to provide liquidity to pay estate taxes.

   • For larger estates, estate taxes can be a significant burden.

   • The death benefit can help heirs avoid having to sell off assets to cover these taxes.

2. Preserving Wealth:

   • By providing funds for estate taxes, survivorship life insurance helps preserve the value of the estate for future generations.

3. Providing for Heirs:

   • The death benefit can provide a financial benefit to heirs, such as children or grandchildren.

How Survivorship Life Insurance Works

1. Policy Purchase: A couple purchases a survivorship life insurance policy.

2. Premium Payments: They pay premiums over the life of the policy.

3. First Death: When the first spouse dies, the policy continues. No death benefit is paid.

4. Second Death: When the second spouse dies, the death benefit is paid to the designated beneficiaries.

Important Considerations

• Estate Tax Thresholds: Understand the current estate tax thresholds and whether your estate is likely to be subject to estate taxes.

• Policy Ownership: Proper policy ownership is crucial for maximizing tax benefits. Consult with an estate planning attorney.

• Beneficiary Designations: Clearly designate your beneficiaries to ensure the death benefit is distributed according to your wishes.

• Irrevocable Life Insurance Trusts (ILITs): These trusts are often used in conjunction with survivorship life insurance to further minimize estate taxes.

• Professional Guidance: Estate planning is complex. Work with an estate planning attorney and financial advisor.

Is Survivorship Life Insurance Right for You?

Survivorship life insurance is most often appropriate for:

• Married couples with large estates who are concerned about estate taxes.

• Couples who want to provide a financial benefit to their heirs.

It's generally not suitable for couples who primarily need life insurance to replace income for a surviving spouse.

In Conclusion

Survivorship life insurance is a specialized tool that can be highly effective in estate planning. However, it's essential to understand its unique features and seek professional guidance to determine if it's the right strategy for your situation.