For couples looking to secure their family’s financial future after they pass, survivorship life policies offer an innovative form of estate planning that can significantly ease potential tax burdens and preserve more assets for your family.
Foundational estate planning tools like a final will and testament or a trust are essential – but they alone may not fully address the potential for significant estate taxes that could diminish the planned inheritance for your beneficiaries.
While often overlooked, survivorship life policies offer a powerful, specialized estate planning instrument with unique benefits for mitigating tax impacts and maximizing inheritances.
In this blog, the Law Office of Vidhya Babu, a leading estate planning firm serving San Mateo and the California Bay Area, will break down what a survivorship life insurance policy is, the unique benefits it brings for estate planning, and how it can help your family achieve your legacy goals.
What is a Survivorship Life Insurance Policy?
A survivorship life insurance policy, also known as a second-to-die life insurance policy, is a type of joint life insurance policy that covers two individuals at once.
In a traditional life insurance policy that covers a single individual, the benefits are paid out upon the policy holder’s death – but in a survivorship life policy, the insurer pays the death benefit only when both policy holders have passed. This unique characteristic is why this form of life insurance is commonly called a second-to-die policy.
On the surface, this may seem counterintuitive – after all, what good is survivorship insurance if both parties are deceased?
However this unique policy offers several benefits for estate planning, especially when the survivorship policy holders have significant assets.
Let’s look at the benefits of survivorship life insurance in depth:
Minimize Estate Taxes
One of the primary benefits of a survivorship life insurance policy is its power to mitigate estate taxes that can otherwise significantly impact the beneficiaries inheritance.
For affluent families with substantial assets, the federal estate tax, which currently sits at a whopping 40% tax rate of assets exceeding the federal exemption amount (currently $13.99 million per individual), is a significant concern.
The unlimited marital deduction generally allows married couples to pass unlimited assets on to the surviving spouse without incurring the estate tax at the first death. However, this tax liability is applied upon the death of the second spouse, when children and other beneficiaries are typically set to receive their inheritances.
This is precisely where a survivorship policy becomes invaluable. A survivorship policy’s tax-free death benefit provides the estate with crucial liquidity to cover the impact of estate taxes on their heirs, preventing them from being forced to sell valuable assets like real estate or a family business to meet tax obligations.
To ensure the proceeds are truly excluded from the taxable estate and maximize this benefit, the help of an experienced estate planning attorney is vital. They will ensure that the survivorship policy is properly owned by an Irrevocable Life Insurance Trust (ILIT).
When significant assets on the level of multimillions of dollars are at play, the strategic benefit of a survivorship policy in preserving your legacy becomes clear.
More Affordable Premiums
Because survivorship life insurance policies don’t pay out until both policyowners have passed, they are able to provide a desired larger death benefit at a more cost-effective premium than two individual life insurance policies would offer for the same coverage amount. This makes survivorship policies a more attractive alternative for families looking to establish a significant financial legacy.
Inheritance Equalization
Sometimes one spouse may have more assets to contribute to their children’s inheritances than the other, such as with business ownership. A survivorship policy can provide liquid funds to equalize the inheritance among heirs. This helps to avoid personal conflicts and challenges from unhappy heirs, ensuring each receives a fair share.
Provide Financial Stability for Permanent Dependents
A survivor life insurance policy can provide a permanent dependent or beneficiary with special needs with financial stability. The liquidity of the policy can fund a special needs trust that can guarantee the dependent has the care they need long-term.
Business Succession Planning
A survivorship policy can also be useful for business succession planning. While survivorship insurance is most commonly used by married couples, it can cover any two people with a shared financial interest, including business partners.
For example, using a second-to-die policy can provide the liquid funds for a buy-sell agreement upon the death of the second partner. This can ensure a smooth transfer of ownership, or provide the capital needed for heirs who inherit the business to manage it, making a survivorship life policy a valuable tool for long-term business continuity and succession planning.
Create Charitable Giving
In some cases, wealthy individuals may choose to name a charity as the beneficiary of their survivorship life policy. This can allow them to donate a significant sum, without taking funds from other estate plans designed to provide for their heirs.
How a Survivorship Life Insurance Policy Works
Now that we understand what a survivorship policy is and the many benefits it offers, we can talk about how this type of life insurance works in practice.
The Premium of a Survivorship Life Policy
For a form of life insurance that offers as many benefits as survivorship insurance, you might suspect that the premiums would be quite costly. Rather, a survivorship policy can actually be very cost-effective.
Because the insurer does not payout until both policyholders have passed away, this creates less risk for the insurer due to the longer combined life expectancy of two individuals. The premium of a survivorship life policy reflects that, and is typically lower than the cost of purchasing two separate life insurance policies with a similar death benefit.
The actual premium of a survivorship life policy is determined by several factors:
- The age of the policy holders
- The health of both insured
- The exact policy type (whole life or universal options)
- The amount of death benefit desired
Even when one party in the policy has poorer health than the other, the risk is considered to be averaged out, making survivorship policies a great option when individual coverage may be too cost prohibitive.
With flexibility in the policy type, holders can opt for whole life policies with fixed premiums and guaranteed value growth, or look for universal policies with more flexibility in premiums and death benefits, making survivorship insurance a versatile option able to fill a variety of needs.
When Does the Insurer Pay the Death Benefit?
The defining characteristic of a survivorship life policy is that the insurer does not pay out until both policy holders have passed away. This is why these types of policies are sometimes called second-to-die life insurance.
This means that in the event that one spouse passes away, the policy will not pay out anything to the surviving spouse. The policy will remain active, with premiums continuing to be paid by the surviving spouse or from the policy’s cash value.
Once the second policy holder has passed, the death benefits will be paid out to the named beneficiaries or the designated trust in a lump sum.
This delayed payout makes a survivorship policy extremely beneficial for estate planning needs after both partners have passed away, making funds available to cover estate taxes and other costs, while keeping the beneficiaries’ inheritances intact.
Who Can Benefit Most From a Survivorship Life Policy?
Not everyone will have the need for a survivorship life policy. Survivorship insurance most often benefit:
- Couples with significant financial holdings and assets that are likely to exceed federal or state estate tax exemptions
- Families with large holdings of illiquid assets, such as businesses or real estate
- Couples who wish to leave a guaranteed financial legacy to future generations or even charities
- Business partnerships who need to plan their succession
- Families with special needs children or permanent dependants who require long-term care and financial support
The Importance of Professional Guidance for Estate Planning and Survivor Life Insurance
If you fall into any one of these categories, consider partnering with an estate planning attorney such as the Law Offices of Vidhya Babu for complete and comprehensive legal counsel regarding estate planning tools like survivorship life insurance policies, wills and trusts.
When there are significant assets at play, estate planning isn’t something that you should take a D-I-Y approach to. Effectively planning for your family’s future requires a deep understanding of complex tax laws and sophisticated estate planning structures like Irrevocable Life Insurance Trusts (ILITs). To get the most out of these structures, professional estate planning is key.
By working with an estate planning attorney like Vidhya Babu, you can get expert advice on the right estate planning tools for you, including survivorship life insurance policies, to make sure you are setting up the best structure for your family.
At the Law Offices of Vidhya Babu, our decades of experience in estate planning, probate, and trust administration have helped families in San Mateo and the greater San Francisco Bay Area choose the right structures to preserve their wealth and ensure their beneficiaries receive their proper inheritances.
A survivorship life policy is more than just an insurance product. It is a way to strategically plan for your family’s future, while minimizing tax consequences and providing you peace of mind that your family’s financial future is secure.
If you’re in need of estate planning help in San Mateo or anywhere in the San Francisco Bay Area, contact the Law Offices of Vidhya Babu today. Let us build your family’s legacy together.