As you age, you might weigh the options for providing for your beneficiaries after death and how you can plan your estate. While many major insurance companies offer life insurance plans, you may want to look into survivorship life insurance to protect beneficiaries.
Survivorship life insurance offers some key advantages and is carried by many providers, including Pacific Life, Progressive and MassMutual. To determine if survivorship life insurance is right for your family, we’ll outline how this policy works and how it compares to other options.
Key Takeaways
Survivorship life insurance covers two partners and takes effect after both partners pass on. It’s a two-in-one policy where separate plans aren’t required for each individual.
This is a viable insurance option for businesses or families looking to protect their money and property from uncertainties. It can also help alleviate debt beneficiaries would have to pay after the policyholders’ deaths.
If you have children, especially those with disabilities, the plan can protect their disability status over time, but families should be wary of setbacks in certain situations.
Survivorship Life Insurance Explained
To sum up how survivorship life insurance works, Matthew Carlin, owner of Carlin Financial Group, explains:
“Survivorship life insurance, also known as a second-to-die policy, is a joint permanent life insurance policy that pays out upon the death of all insured parties… Who might benefit the most from this type of policy? Well, if you know your heirs will likely be hit by a heavy tax bill, you might be an ideal candidate for survivorship insurance, particularly if your state does an estate tax.”
Here are some key features survivorship life insurance provides:
Assets Are Protected
This type of insurance is often a go-to policy for estate planning. If one or both policyholders own plenty of liquid assets, a survivorship life insurance plan can reduce the estate taxes their heirs have to pay. This allows heirs to keep all or most of what they inherited and not need to auction it away to recoup losses or pay off debt.
Heirs Receive Inheritance Money
Survivorship life insurance can be used as a savings fund for beneficiaries such as children and grandchildren. After both policyholders pass on, the money is untouched and goes directly to the beneficiaries. This means you can award a child with money after death, and they can use it as they see fit.
Family Businesses Change Hands Securely
After the death of two business owners of the same company, a new owner or owners can be appointed in writing so the business can legally obtain new ownership and continue without the original owners. This can protect the business from dissolving, being sold to another company, or being taken over by someone unfavorable to the original ownership.
How Are Survivorship Life Insurance Policies Helpful in Estate Planning?
A survivorship life insurance policy benefits couples who either own a lot of assets or have a high net worth. A lot of money guarantees higher taxes than normal, so when this plan takes effect, the beneficiaries pay less in taxes than the original owners due to the inherited money and property.
This inherited money is called a “death benefit.” It’s often used to cover administrative and estate tax expenses, so the beneficiary will pay nothing or very little out of pocket. For example, the beneficiary won’t need to make personal sacrifices like selling their car to cover a hefty estate tax.
Estate taxes must be paid at some point after the second policyholder dies. When this happens, the beneficiary can pay up to 40% of assets left behind worth $1 million or more. When policyholders protect assets, the list of taxable assets decreases, as does the estate tax the heir would be responsible for paying.
States With Estate Taxes
In addition to the District of Columbia, 12 states currently have estate taxes. These states are Connecticut, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont and Washington. If you’re in a state not listed here, you don’t need to worry about this tax when transferring your property ownership to an heir.
Aside from alleviating estate taxes, survivorship life insurance policies can help protect pre-existing assets. These include cars, homes, buildings, fine art, jewelry, inventory, and amenities. Protecting your goods with this plan means they won’t be auctioned off in an estate sale after you and your partner pass on.
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Pros and Cons of Survivorship Life Insurance
Survivorship life insurance is useful in some situations, but it’s not a one-size-fits-all plan for every couple with money and assets to safeguard. This plan has advantages over other joint life insurance plans, but that also comes with setbacks, which might negatively impact you or others involved in the plan.
With this in mind, have all the facts before deciding on a particular plan from an insurance provider.
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Here’s what to take into account when considering a survivorship life insurance plan:
Pro: One Plan for Two People
The two policyholders are covered in the same plan. They don’t necessarily need to purchase separate life insurance plans, making everything easier from an insurance standpoint. Having one plan for both holders saves money on insurance overall.
Con: No Benefits for Surviving Policyholders
Unlike other life insurance plans, survivorship life insurance policies don’t award any money to surviving insurance holders after their other half in the plan dies. For instance, if a husband dies, the wife won’t receive any money from the husband, as that money will be awarded to beneficiaries after the wife dies. Consider a different policy if you need financial aid sooner rather than later.
Pro: Great for Medical Conditions
If you or your spouse has a medical condition, you might have to pay a lot for individual life insurance. Being under a survivorship life insurance plan overrides high premiums for medically needy holders, as long as the other partner in the plan is still in good health.
Con: Harder to Manage for Surviving Policyholder
The survivorship life insurance policy still requires payments to continue after one of the two policyholders dies. This means the premiums increase for the surviving holder, which can be difficult if they don’t have access to their partner’s finances.
Pro: Works With Special-Needs Plans
Children who have disabilities and are under special needs trusts can continue to get the care and the money they need to pay for it after the death of both policyholders. This will allow the child to qualify for Medicaid and other programs once he or she becomes an adult.
Con: Divorce Can Complicate the Plan
If married couples under a survivorship life insurance plan decide to split up, both holders may still have to pay premiums toward the money for beneficiaries. Suppose you can foresee separation from your spouse. You want a plan that can be split or modified to exclude you from paying taxes or premiums for beneficiaries you’re not interested in paying for.
Survivorship Life Insurance Considerations
While a survivorship life insurance policy comes with many benefits for families and business owners, there are also several things to remember. There could be other plans available to suit your needs better. These include first-to-die life insurance and variable universal life insurance.
Take a look at three key things to know about survivorship life insurance plans to determine if it’s the best for you.
Understand the Costs
Survivor life insurance policies can include high premiums if both you and the other policyholder are old, have a history of smoking, or suffer from health conditions. In this case, you might want to look at separate policies for the two of you, each tailored to your specific situation.
Know Your Total Value in Assets
Survivor life insurance is more effective for families with a high net worth consisting of property and other assets. If you only want to transfer inheritance money to a beneficiary, you might fare better with a simpler joint life insurance plan.
Envision Yourself in the Future
Consider if you see yourself outliving your partner in the near future and your current financial situation. If you’re looking to receive a death benefit from your partner, there are “first-to-die” life insurance plans you can consider. There’s no death benefit for surviving policyholders in a survivorship life insurance plan. Furthermore, a survivorship plan means the surviving policyholder will pay more premiums than if both holders were still alive.
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Frequently Asked Questions
How does life insurance help with estate planning?
Life insurance allows you to set cash aside so beneficiaries can receive it after you pass on. After both policyholders die, the beneficiary is the money’s rightful owner.
What are the benefits of life insurance for an estate?
Life insurance protects money and assets when the property owner passes away. When this happens, the beneficiary will own the assets and money, and the insurance also works to reduce taxes imposed, resulting in the original owner’s death.
Can survivorship life insurance include more than 2 people?
A survivorship life insurance can only cover two people at a time. If you’re looking to set up a policy for parents and grandparents designed to help a child financially, you can consider creating two plans for each couple.
What is the difference between joint life and survivorship life insurance?
A survivorship life insurance plan involves giving a death benefit to an heir after both policyholders die. A joint life insurance plan involves giving the surviving policy owner a death benefit after the other holder passes away. This plan usually does not grant funds to an heir, such as a child.
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