Survivorship Life Insurance

What Is Survivorship Life Insurance?

Survivorship life insurance, also known as second-to-die insurance, is one of two types of joint life insurance policies. A joint life insurance policy covers two people. This type of life insurance is typically marketed towards married couples who want to leave a death benefit for their beneficiaries. Long-term partners and business partners might also consider a joint life insurance policy.

There are two types of joint life insurance: first-to-die and second-to-die. The difference between these two policies is when the death benefit pays out. For first-to-die insurance, the payout occurs when the first insured person passes away.

A survivorship policy doesn’t pay out until both policyholders have passed away. This policy may have a lower premium than a first-to-die policy because the probability of having to pay out the death benefit is lower. Couples generally purchase survivorship policies to provide a death benefit to their heirs.

Survivorship life insurance is a niche product most often used for specific situations and is rarely used as the sole life insurance solution. For a couple that may include someone who is uninsurable, using a joint policy may still reduce the cost compared to a policy on only the insurable individual.

Stephen Kates, CFP®Principal Financial Analyst for Annuity.org

Stephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for Annuity.org, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.

How Does Survivorship Life Insurance Work?

A survivorship life insurance policy can be a term or permanent policy. A term life policy’s coverage lasts for a set number of years before it must be renewed, while a permanent policy lasts your whole life if you continue to pay the premiums. Most survivorship life insurance policies are permanent policies.

If you choose a term life insurance policy, you may have two options for the death benefit payout. Some policies pay out a fixed sum, while others have a payout that decreases over time. The decreasing term insurance is best for those who want to use the policy to cover a specific, diminishing debt like a mortgage.

Survivorship policies don’t pay out until both the insured people pass away. So, when the first person covered by the policy dies, the second person must continue to pay the premiums to keep the policy active. When both policyholders pass away, the death benefit is paid to whomever the policyholders named as their beneficiary.

When To Consider Survivorship

For some couples, purchasing a joint life insurance policy makes the most sense. Getting one joint policy can be more cost-effective than purchasing two separate policies.

The question then becomes, should you choose a first-to-die policy or a second-to-die policy? The answer depends on your personal financial circumstances. Here are a few situations where purchasing a survivorship policy might be the best choice:

When a Survivorship Policy Makes Sense

Estate Tax Funds

You might use a survivorship policy to set aside money to help your heirs pay for taxes and fees associated with your estate.

Special Needs Child

Parents of special needs children might establish a fund with their survivorship policy to provide care for their child should both parents die.

Charitable or Educational Trust

You can use a survivorship policy to set up a charitable donation or to set aside money for your children or grandchildren’s school tuition.

Partner with Health Issues

If one person is in good health but the other person has health issues, a second-to-die policy might be the best option for leaving money to the couple’s heirs.

Pros and Cons of Survivorship Life Insurance

A survivorship life insurance policy can help you and your spouse provide for your heirs after you’re gone, but this type of life insurance comes with some drawbacks. Before you purchase any life insurance policy, you should weigh the pros and cons to determine if it’s the right choice for your family.

Pros

One of the advantages most couples consider when choosing a survivorship policy is the cost. The premium payments on a joint policy, whether it’s first-to-die or second-to-die, are likely to be more affordable than paying premiums on two separate policies. Second-to-die policies are also less expensive than first-to-die policies.

Another benefit of a survivorship policy is the ability to equalize your inheritance. If you have more than one beneficiary, you can set up the policy through a trust that will equally distribute your death benefit to multiple dependents, according to an article from Forbes.

Finally, the underwriting process for survivorship policies is more liberal than with other types of life insurance. This means that if you or your spouse have health issues that might prevent you from getting a traditional life insurance policy, you may still be able to get coverage under a survivorship policy.

Cons

Despite its benefits, a survivorship life insurance policy isn’t right for everyone. If one spouse has health issues, smokes or is significantly older, the joint policy might have a high premium. The couple’s heirs will only receive one payout, rather than the two potential payouts afforded by separate policies.

The second-to-die payout of survivorship policies may complicate things for some people. The surviving spouse receives no death benefit with this policy and must continue to pay the policy’s premiums to keep it in force. If your income decreases significantly after the death of your spouse, paying the premiums can become a burden during an already difficult time.

Furthermore, if the couple gets divorced or separated, the survivorship policy is not automatically nullified. Unless you purchase a rider to anticipate this occurrence, the life insurance coverage and required premium payments are still in force even if the policyholders are separated or even remarried.