Survivorship life insurance, also known as second-to-die life insurance, is a type of permanent life insurance policy that covers two individuals, typically spouses or business partners, under one policy.
The policy pays out a death benefit only when both individuals have passed away. This means that the beneficiaries receive the policy payout only after the death of the second person covered by the policy.
Advantages of Survivorship Life Insurance in Estate Planning
- Tax-Free Death Benefit: The primary advantage of survivorship life insurance is that it provides a tax-free death benefit to the beneficiaries. When both policyholders pass away, the death benefit is paid out to the beneficiaries without any income tax implications.
- Liquidity for Estate Settlement: Survivorship life insurance can provide liquidity for settling estates, especially if there are illiquid assets involved. For example, if the deceased owned a business, real estate, or other non-liquid assets, the life insurance policy proceeds can be used to pay off debts, taxes, and other expenses related to the estate settlement.
- Payment of Estate Taxes: One of the most significant advantages of survivorship life insurance is its ability to pay estate taxes. If the value of the estate exceeds the federal estate tax exemption limit ($11.4 million per individual in 2022), the heirs may face significant estate tax liabilities. By using the policy proceeds to pay these taxes, the heirs can avoid depleting their inherited assets.
- Wealth Transfer: Survivorship life insurance can be an effective way to transfer wealth between generations. The policy proceeds can be used to fund trusts for children, grandchildren, or other family members, providing them with a financial safety net and helping them achieve their long-term goals.
- Business Succession Planning: In addition to personal estate planning, survivorship life insurance can play a crucial role in business succession planning. It can help ensure that the business remains afloat during the transition phase and provide funds for the buyout of shares from the deceased owner’s estate.
- Retirement Income: Some survivorship life insurance policies offer a feature called a “living benefit,” which allows policyholders to accelerate the death benefit while they are still alive. This can provide retirees with a source of tax-free income, supplementing their retirement finances.
- Protection for Dependents: If either policyholder has dependents, survivorship life insurance can provide additional protection for them. The policy proceeds can be used to cover funeral expenses, medical bills, and other financial obligations, ensuring that the dependents are well taken care of even in the event of both parents passing away.
- Flexibility in Premium Payments: Many survivorship life insurance policies offer flexible premium payment options. You can choose to pay premiums annually, semi-annually, quarterly, or monthly, depending on your budget and cash flow preferences.
- Customization Options: Survivorship life insurance policies can be customized according to your needs and objectives. You can choose the coverage amount, term length, and riders (additional features) that best suit your circumstances.
- Peace of Mind: Perhaps the most significant advantage of survivorship life insurance is the peace of mind it offers. Knowing that your loved ones will be financially secure even in the worst-case scenario can provide immense comfort and relief.
Survivorship life insurance can be a valuable tool in estate planning, offering numerous benefits, including tax-free death benefits, liquidity for estate settlement, payment of estate taxes, wealth transfer, business succession planning, retirement income, protection for dependents, flexibility in premium payments, custom