There are two main categories of life insurance: permanent and temporary protection. While both fulfill one intention—to provide a death benefit to heirs—some policies are a better solution than others because they serve a particular need. The nuances are puzzling for most consumers when purchasing life insurance.
Today, I will address survivorship life insurance which is also referred to as joint life insurance or second-to-die insurance. I will present you with the five most common reasons to own such policy.
What Is Survivorship Life Insurance?
Also referred to as second-to-die or last-to-die policies, survivorship life insurance is a single policy that protects two individuals and pays the death benefit upon the death of the second insured. Ordinarily, both people are spouses.
Survivorship Life Insurance History
Prior to the Economic Recovery Tax Act of 1981 (ERTA), the foremost objective of life insurance to provide aid in paying estate taxes when one of the spouses died. After the ERTA, the marital deduction was introduced, which states that all property left to a surviving spouse passes free of the estate taxes.
This eliminated the need to pay taxes on the death of the first spouse. However, once the second spouse passes away, the beneficiaries will have to pay the full taxes if they intend to inherit the property. Since there could be significant time delays between the first and last death, the value of the estate is likely to increase, and consequently, the tax bill could be even higher.
This is the reason insurance carriers came up with the concept of a new product that pays proceeds on the death of the second insured, helping heirs in meeting the tax obligation on properties they acquire.
Reasons to Consider Survivorship Life Insurance
Life insurance coverage isn’t a one-size-fits-all solution and should never be interpreted as such. It must always reflect one’s overall health, financial goals, sufficient death benefit, and the individual’s ability to pay for it. There are a few reasons you should consider survivorship coverage. Let’s take a look at the five most common.
1. The Impact of Taxes on Your Estate
As mentioned before, under current tax laws, estates’ assets are transferred, tax-free, from one spouse to another but can put a huge strain when the last person dies, and other family members inherit that estate.
Life insurance can provide the liquidity needed for your heirs to pay off estate taxes. Since life insurance proceeds are paid tax-free, your heirs can use that money to meet tax obligations.
Moreover, if set up correctly, the policy can be excluded from the married couple’s taxable estate. According to the IRS website, estate taxes are due nine months after the death of the second person. At the time of publication, estate tax can be upward of 40 percent and are subject to estate tax if the property is valued more than $5.49 million.
2. Protecting a Special Needs Child
If you are a parent of a child with a certain disability or other special need, you know how unpredictable and worrisome life can be at times. The average annual fees for full-time centers for an infant can range from $4,822 to $14,366 and will increase as the child grows.
Life insurance proceeds can be put into a special-need-trust to fund the constant care and financial security of your child should both parents become deceased.
3. Protecting Your Business
You have a family business that you worked for all your life, and you want to keep it in the family after you’re gone. Just like your estate taxes, if not carefully planned, your beneficiaries will inherit your business but also a significant tax burden that comes with it. If they can’t pay the taxes, they will be pressured into selling and liquidating the business for a lower price than valued, and by doing so, put many family members and employees out of work.
4. Uninsurable Spouse
Since survivorship coverage pays one death benefit after the death of the second insured, insurance carriers tend to be more lenient in underwriting two individuals as opposed to an individually underwritten life insurance policy.
There are a few instances in which one spouse is in good health while the other isn’t and can’t get approved for an individual policy. A survivorship policy can remedy this circumstance by having both spouses under one policy. Covering two people can also be cheaper than buying two individual plans.
5. Leaving a Legacy
For some who have dedicated their lives to serving others, leaving a legacy is what they live for. Whether you choose to transfer your wealth to an institution, university, or charity, make sure your surviving spouse doesn’t need the money from the death benefit and will still be able to pay for the coverage after your passing.
Survivorship life insurance isn’t for the average Joe. It is mostly intended for high-net-worth individuals who wish to transfer their estate or business to their heirs without generating a tax burden. If you worked all your life to build financial security for you and your loved ones, make sure you let them keep it after you’re gone. By not doing so, you allow it all to be diminished by liquidation to pay federal or estates taxes.