Survivorship life insurance, also known as second-to-die insurance, provides a death benefit payout when both policyholders pass away. This unique approach is growing more popular for estate planning and business succession planning. In this article, we’ll take a comprehensive look at how these policies work, their benefits, drawbacks, and the process for applying for coverage.
How Survivorship Policies Support Estate Planning Goals
Survivorship insurance offers several advantages for estate planning. The policies provide tax-minimization benefits, ensuring heirs receive a larger inheritance. Proceeds from the policy can also be used to pay estate taxes so beneficiaries get more of their inheritance. These policies also guarantee inheritance sums for loved ones and supply liquidity to support business transitions.
How to Do Survivorship Life Insurance Works
Survivorship life insurance covers two individuals under a single permanent policy, only paying out when both policyholders die. Premiums are typically lower than buying two separate policies. After the first death, the surviving policyholder pays ongoing premiums to maintain coverage. The death benefit is eventually paid to the named beneficiaries.
How can survivorship life insurance policies be used to protect a business?
- Provides funds to heirs to buy out shares for ownership transition.
- Death benefits are divided equally among heirs interested in continuing business and those who want to cash out.
- Part of a buy-sell agreement to ensure the business survives if a partner dies.
- Less expensive than individual policies, cost-effective liquidity for heirs.
- Ensures smooth business transition and protects from financial losses.
How can survivorship life insurance policies be used to protect a business from financial losses?
- Provides death benefit to divide equally between heirs who want to continue business vs cash out
- Part of the buy-sell agreement gives death benefit if a partner dies, ensuring the business survives
- Gives liquidity to cover heirs’ future estate taxes, especially useful for high net worth owners
- Allows smooth ownership transition and protects business from financial losses
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Process for applying for a Survivorship life insurance policy
The application process involves:
- Assessing needs and desired coverage amount
- Selecting a policy type like whole life or universal life
- Choosing the two insured individuals
- Naming beneficiaries of the death benefit
- Submitting personal and financial information
- Completing medical underwriting requirements
- Making ongoing premium payments after approval
It’s important to work with an insurance agent to choose the right policy.
what documents are required to apply for a survivorship life insurance policy?
- Personal information – age, health status, income
- Financial information – assets, liabilities
- Medical exams or records may be required
- Name the 2 insured individuals
- Name the beneficiaries
- Work with an insurance agent or advisor to get the right documents and policy.
What is the Price payout period for a survivorship life insurance policy?
- Payout occurs only after both insured individuals pass away.
- The policy continues until the second death.
- The payout period varies based on policy terms.
- Premiums are less expensive than two individual policies.
- Premium amount based on age, health, income, death benefit, and policy type.
- The premium schedule depends on policy type and health.
Weighing the Pros and Cons of Survivorship Policies
Advantages
- Lower premium costs
- Ability to equalize inheritance
- More flexible underwriting
Lower premium costs compared to separate policies, ability to distribute death benefits evenly among multiple beneficiaries, and more flexible underwriting for those with health conditions.
Disadvantages
- No payout after the first death
- Premium burden if income drops
- Coverage continues after divorce
Premiums can be high if one spouse is older or unhealthy, heirs receive only one payout rather than two, and the surviving spouse gets no payout after the first death and must continue premiums. While these policies support estate planning, the lack of an immediate payout and issues around divorce make them unsuitable for some couples. Carefully evaluating financial goals with an advisor is key.
In summary, survivorship life insurance can provide estate tax minimization and business succession planning benefits. However, limitations around divorce and lack of a payout at the first death are important considerations. Taking time to assess your specific financial circumstances and goals with an insurance professional will help determine if a survivorship policy aligns with your needs. While not appropriate for every situation, these policies can be a useful option as part of a comprehensive estate plan for high-net-worth individuals.