Estate planning tools are more abundant and accessible than they have ever been. One particular estate planning tool you may not be familiar with is survivorship life insurance.
Although standard life insurance policies are quite popular among the general public, survivorship life insurance policies remain underutilized. That is a shame because those policies offer benefits that other plans cannot provide.
Is it time for you to consider purchasing a survivorship life insurance policy? Will it be a helpful tool in your estate planning strategy? The details in this article should help you answer those questions.
What Is Survivorship Life Insurance?
If you have not heard the term survivorship life insurance before, maybe you know its other names. Insurers may also refer to it as second-to-die or joint survivorship life insurance. Those alternative names for this policy hint at how it differs from standard life insurance plans.
Survivorship life insurance policies cover two people. Because it covers two people, it will not pay out until both policyholders have passed away.
Many wealthy couples have survivorship life insurance. Notably, survivorship policies are not limited to married couples. The relationship shared by the two policyholders does not affect their eligibility for this life insurance plan.
What Are the Benefits of Survivorship Life Insurance?
Purchasing a life insurance policy that only pays out after two people die may seem odd when there are plans that pay out after the death of a single person. However, there are real benefits that come from owning this type of joint policy.
Survivorship Life Insurance Policies Are More Affordable
One of the key benefits provided by joint survivorship insurance is its lower price tag. If you and your spouse plan to take out separate life insurance policies, you may find that the combined cost is pretty expensive. Because of the price tags attached, you may hold off on getting the policies until you have more money.
Survivorship policies require a lower cost commitment. These joint policies are almost always more affordable than separate life insurance plans. You can get them earlier and feel good knowing you have set aside something substantial for your kids.
Survivorship Life Insurance Policies Reduce Tax Obligations
Getting a second-to-die life insurance policy also makes sense if you want to reduce your tax obligations as a couple.
If you and your spouse have separate policies, the surviving spouse may need to pay taxes after receiving the payout from their plan.
The surviving spouse may have to pay taxes if they opt to receive the death benefit from their partner’s policy as an annuity. However, they can avoid those taxes if they receive the death benefit as a lump sum.
The spouse may also pay estate taxes if the death benefit pushes the value of the decedent’s estate past the established threshold. According to the IRS, the estate tax exemption for 2023 is $12.92 million.
Only the amount of the estate that exceeds the established threshold will be subject to estate taxes. Still, that will reduce the value of the estate significantly.
You and your spouse can reduce those tax obligations by securing a joint policy.
Survivorship Life Insurance Policies Accumulate Value
Survivorship policies are also worth getting because they accumulate value. That means you can borrow money from your survivorship policy. Borrowing money from a life insurance policy may even make more sense for your situation in a few ways.
For starters, you do not need to justify why you are borrowing money. As long as your policy has accumulated enough value, your loan will be approved, no matter the reason behind it.
These loans are also processed quickly. You will get your hands on your money not long after applying for the loan. Payment terms for these loans are also flexible. Life insurance loans are also not subject to tax, but you will pay interest.
Survivorship life insurance policies tend to amass a lot of value, so you can borrow a significant amount of money if you are so inclined.
Survivorship Life Insurance Policies Are Easier to Secure
Lastly, survivorship life insurance policies are helpful because they make obtaining coverage easier for certain individuals. The individuals we are referring to here are those with serious pre-existing health conditions.
According to Nerd Wallet, individuals with asthma, cancer, depression, diabetes, epilepsy, hypertension, high cholesterol, HIV/AIDS, heart disease, and obesity tend to raise flags with insurers. If you have one of those conditions, an insurer may refuse you coverage. Factors such as your age and your family’s medical history may also inform the insurer’s decision.
Survivorship policies allow you to secure coverage even if you have those pre-existing conditions. Even if your health situation is a cause of concern for the insurer, they may still be willing to provide coverage because of your partner.
What Are the Drawbacks of Survivorship Life Insurance?
The benefits of survivorship life insurance plans are substantial. But, of course, there are also drawbacks to consider. We cover those drawbacks below.
Survivor Life Insurance Policies Offer No Protection for Fellow Policyholders
Arguably, the biggest drawback of survivorship life insurance is the fact that your fellow policyholder will not get any money from it. Since the plan only pays out after both of you die, the co-owner that dies last will not receive any benefits.
That is the reason why wealthy couples are the ones who usually go for this policy. They know they can survive without the other’s income, so leaving everything in their policy to their kids is not risky.
You should only get this policy if you know your partner has a steady source of income. Otherwise, the two of you may be better off getting separate plans.
Survivorship Life Insurance Policies Take Longer to Pay Out
Choosing a survivorship life insurance plan also means you are okay with your kids potentially waiting a long time for the payout. Again, this will not be an issue for wealthy couples because the surviving partner can still support their kids financially. However, things are different if one spouse pays the bulk of the bills and fills the savings accounts.
You should consider the potentially long wait your children may endure if you get a survivorship plan. Will your spouse and kids be able to handle that wait? Your answer to that question will determine if you should get this policy.
How Survivorship Life Insurance Helps with Estate Planning
At this point, you should be familiar with the fundamentals of survivorship life insurance. You can probably tell if it makes sense for your specific situation.
Still, you may wonder if it can be the effective estate planning tool you need. Continue below to learn how you can use this policy for estate planning.
You Can Use Survivorship Life Insurance Policies to Pay Estate Taxes
Earlier, we mentioned that survivorship policies help reduce your partner’s tax obligations. From a tax perspective, it does more than that. Your children can also worry less about taxes because you took out a survivorship policy.
As the survivorship policy pays out, your children can use its death benefit to pay the estate taxes. The estate tax threshold for married couples is $25.84 million for 2023.
Thanks to the higher tax threshold and the money they are getting from the policy’s death payout, your children can take home a more substantial sum from your estate.
You can protect your kids better from financial hardships by naming them as the beneficiaries of your joint survivorship policy.
You Can Use Survivorship Life Insurance Policies on Other Estate-Related Expenses
You can use payouts from survivorship life insurance plans for more than paying estate taxes. They are also useful for covering other estate-related expenses.
Your beneficiaries can use the payout from the policy to cover the funeral expenses of whichever policyholder dies second. The payout can also hire an attorney to manage the distribution of the assets in the estate. If there is a will available, the payout can also cover the cost of probate.
The estate may also have some outstanding debt at the time of the second policyholder’s death. In that case, your beneficiaries can draw money from the payout to cover those debts.
No matter what estate-related expenses emerge, you can use the payout from the policy to cover it.
Survivorship Life Insurance Policies Buy Time for Estate Planning
Distributing the assets in an estate takes time. Whether the assets are coming from a trust, distributed via a will, or handled using both estate planning instruments, the process will take time.
You would like to think that your beneficiaries will be all right even if they cannot immediately receive assets from your estate. However, that may not be the case if the death of the second policyholder comes as a surprise. In that situation, your kids may struggle to cover their expenses. Or at least they would have were it not for your survivorship policy.
The survivorship policy can provide the quick infusion of money your beneficiaries need. With that money, they can let the estate distribution play out without worrying about their day-to-day expenses.
Survivorship Life Insurance Policies Can Fund Trusts
Setting up a trust for estate planning is beneficial in various ways. By creating that trust, you can preserve assets and even grow them for the benefit of your heirs. The trust can also help you bypass taxes that would have otherwise diminished the value of your estate.
Trusts also allow you to exercise some control regarding when your beneficiaries will receive their shares of your estate. For example, you can instruct your trustee to hold the assets inside the estate until your beneficiaries reach a certain age. Holding the assets in the trust relieves your beneficiaries of duties they cannot handle immediately.
You can fund the trust by transferring ownership of assets directly to it. As the grantor, you can also fund the trust using the money in your bank accounts. Of course, the payout from your survivorship life insurance plan can also be transferred directly to the trust.
Name the trust as your policy’s beneficiary if you want to fund it that way. Enlist the help of an estate planning attorney if you want to set that up correctly.
Survivorship Life Insurance Policies Can Fund Special Needs Trusts
If you have a child with a mental and/or physical health disability, it is difficult not to wonder about their future once you and your spouse are gone. Establishing a special needs trust can help secure your child’s future.
A special needs trust holds the assets you left behind for your child and reserves them for certain expenses. To be more specific, they will use these assets in the trust to pay for any caretakers your child may need and some medical expenses.
Creating a special needs trust is crucial because it allows your child to benefit from your estate without losing government assistance. Simply put, the special needs trust can make it easier for your child to live in relative comfort even if you are not around to watch over them anymore.
The payout from your survivorship life insurance plan can also fund the special needs trust.
Survivorship Life Insurance Policies Can Facilitate Smooth Business Succession
In the aftermath of your passing, your business may be left in a state of disarray. In addition, with your assets still going through probate, your children may have trouble running the business without your money.
Instead of leaving your children to deal with a potentially big mess, you can put them in a better position to take over the family business by giving them some extra funding courtesy of your survivorship policy. The payout can help your children bankroll the operating expenses while they wait for your other assets to become accessible.
You do not need to leave your business in the hands of your kids. If you and your business partner have chosen certain employees as your successors, you can leave the death benefit of your policy to them so they will have less trouble while assuming control.
A survivorship life insurance policy can be an ideal estate planning tool for couples and business partners. We at the Alber Law Group can show you how to utilize that policy. Reach out to us today if you are looking to get the most out of your insurance plan!