Survivorship Life Insurance Estate Planning: A Comprehensive Guide
Survivorship life insurance is a specialized form of life insurance that provides a death benefit only after the second insured individual passes away. This makes it particularly useful for couples or business partners who want to ensure their heirs are financially protected or their estate obligations are met. The policy is often used to cover estate taxes, which can be substantial, especially for high-net-worth individuals. By providing liquidity at the time of the second death, survivorship life insurance helps prevent the need to sell assets to cover these costs.
One of the primary advantages of survivorship life insurance is its affordability compared to two separate life insurance policies. Since the payout occurs after the second death, the premiums are generally lower than those for individual policies. Additionally, survivorship policies are often easier to qualify for, as insurers consider the combined life expectancy of both insured individuals. This can be beneficial for couples where one individual may have health issues that would make obtaining an individual policy difficult or expensive.
Another key benefit is the ability to use the policy within an irrevocable life insurance trust (ILIT). This strategy can help remove the death benefit from the taxable estate, further reducing potential estate tax liabilities. Survivorship life insurance can also be used to equalize inheritances among heirs, particularly in blended families where one spouse may have children from a previous relationship. By naming specific beneficiaries, the policy ensures that each heir receives a fair share of the estate.
How Survivorship Life Insurance Works
Survivorship life insurance policies are typically permanent life insurance, such as whole life or universal life. This means they provide coverage for the lifetime of the insured individuals, as long as premiums are paid. The death benefit is paid out to the designated beneficiaries only after the second insured passes away. The policy can be structured in various ways, depending on the needs of the insured parties and their estate planning goals.
For example, a couple may purchase a survivorship policy to ensure their children have the funds to pay estate taxes without having to sell the family home or other valuable assets. Alternatively, business partners might use a survivorship policy to fund a buy-sell agreement, ensuring the surviving partner has the resources to buy out the deceased partner’s share of the business. The flexibility of survivorship life insurance makes it a versatile tool in estate planning.
Comparison of Survivorship Life Insurance Providers
| Provider | Policy Type | Minimum Coverage | Maximum Coverage | Premium Range |
|---|---|---|---|---|
| New York Life | Whole Life | $100,000 | $10,000,000 | $1,500 – $5,000/year |
| Northwestern Mutual | Universal Life | $250,000 | $15,000,000 | $2,000 – $6,000/year |
| MassMutual | Whole Life | $200,000 | $12,000,000 | $1,800 – $5,500/year |
| Prudential | Universal Life | $150,000 | $8,000,000 | $1,700 – $4,800/year |
Integrating Survivorship Life Insurance into Estate Planning
To maximize the benefits of survivorship life insurance, it should be integrated into a broader estate plan. This often involves working with financial advisors, estate attorneys, and tax professionals to ensure the policy aligns with other estate planning tools, such as trusts and wills. An irrevocable life insurance trust (ILIT) is a common vehicle used to hold the policy, as it can help avoid estate taxes and provide greater control over the distribution of the death benefit.
Another consideration is the timing of the policy purchase. Since premiums are based on the age and health of the insured individuals, purchasing a survivorship policy earlier in life can result in lower premiums. Additionally, the policy can be structured to include riders, such as a long-term care rider, which can provide additional benefits if one of the insured individuals requires extended care.
Survivorship life insurance is not without its drawbacks. For example, the death benefit is only paid out after the second insured passes away, which means the surviving spouse or partner will not receive any funds during their lifetime. This can be a disadvantage for couples who may need financial support after the first death. Additionally, the policy may not be the best option for individuals with modest estates, as the cost of the premiums may outweigh the benefits.