Estate planning involves a variety of strategies to protect and transfer wealth to loved ones, and one often-overlooked tool is survivorship life insurance, also known as second-to-die life insurance. Unlike traditional life insurance policies that pay a benefit after one person’s death, survivorship life insurance provides a payout only after both policyholders have passed away. This type of policy can be especially helpful in estate planning, particularly for families seeking to preserve wealth, cover estate taxes, or provide for special needs dependents. Here’s a closer look at how survivorship life insurance works and why it can be a valuable component of a comprehensive estate plan.
What is Survivorship Life Insurance?
Survivorship life insurance is a policy designed to insure two people—usually spouses or domestic partners—under a single policy. The unique feature of this policy is that it only pays a death benefit after both insured individuals have passed away. Because of this structure, survivorship life insurance premiums are often lower than those for individual life policies, making it an appealing option for couples seeking to balance affordability with robust financial planning.
Key Benefits of Survivorship Life Insurance in Estate Planning
1. Provides Funds to Cover Estate Taxes
For estates of significant size, estate taxes can be substantial. The federal estate tax exemption is high (as of 2024, it’s $13.9 million per individual or $27.8 million per couple), but some large estates may still face federal or state estate taxes upon the second spouse’s death. Survivorship life insurance can provide liquidity to cover these taxes without forcing heirs to sell assets or liquidate investments. The death benefit paid to heirs can be used to cover taxes, preserving the estate’s core assets and allowing wealth to pass on intact.
Example: Suppose a couple owns a family business or real estate portfolio worth $15 million. Without adequate liquidity, their heirs might need to sell parts of the business or property to cover estate taxes. With a survivorship life insurance policy in place, the death benefit can cover these expenses, keeping the family business or assets in the family.
2. Preserves Wealth for Future Generations
Survivorship life insurance can help preserve wealth across generations. For families with valuable assets or significant investments, this type of insurance allows heirs to inherit property, businesses, or financial portfolios without the need for liquidation. By strategically using survivorship life insurance, families can pass on a legacy while avoiding the financial strain of immediate tax obligations or other expenses.
Example: If a family owns valuable art, collectibles, or a family farm, these assets might hold sentimental value that goes beyond their financial worth. Survivorship life insurance ensures that these treasured assets can stay within the family and continue to be enjoyed by future generations.
3. Supports Special Needs Planning
For families with special needs dependents, survivorship life insurance can be a lifeline, ensuring continued financial support after both parents have passed away. Since survivorship policies pay a benefit only after the second parent’s death, they can serve as a dedicated source of funds for a special needs trust, helping provide for ongoing care and quality of life for a dependent.
Example: Parents with a special needs child can use a survivorship policy to fund a special needs trust, which will provide financial support for the child’s lifetime. This strategy ensures the child has access to funds without jeopardizing eligibility for government benefits.
4. Offers a Cost-Effective Option for Life Insurance
Because survivorship policies cover two people under one plan and pay out only after both have passed, premiums tend to be lower than two individual life insurance policies. This can make survivorship life insurance an affordable solution for couples, especially those in situations where one spouse has health concerns that might make traditional life insurance costly or difficult to obtain.
Example: A couple where one spouse has a pre-existing health condition may find it challenging to secure affordable life insurance. By opting for a survivorship policy, they can secure the same level of coverage at a lower rate, since the policy factors in both spouses’ life expectancy.
5. Flexibility in Policy Structure and Use
Survivorship life insurance policies come with flexible structures, allowing policyholders to customize the terms, payment options, and benefits. Some policies also have a cash value component, which builds over time and can be borrowed against if needed. This flexibility makes survivorship insurance an adaptable tool within an estate plan, especially for couples seeking to balance protection with growth potential.
Example: Suppose a couple has a survivorship policy with a cash value component. They may decide to use this accumulated cash to fund retirement needs or pay off debts while they are both alive. This flexibility can help them adjust their plan based on life changes.
How Survivorship Life Insurance Works in an Estate Plan
To maximize the benefits of survivorship life insurance, it’s essential to integrate the policy into a well-structured estate plan. Here’s how it typically works:
1. Policy Ownership and Trusts
• For high-net-worth individuals, holding the survivorship policy in an irrevocable life insurance trust (ILIT) can be beneficial. By placing the policy in a trust, the death benefit is excluded from the taxable estate, reducing estate tax exposure while still providing liquidity for tax or other expenses.
2. Using the Death Benefit Strategically
• Upon the death of the second spouse, the survivorship policy’s benefit can be used to fund taxes, trusts, or other financial obligations. For example, funds can be directed to a family trust, helping support children, grandchildren, or charitable causes according to the family’s wishes.
3. Providing for Heirs Equitably
• Survivorship life insurance can also be used to provide for heirs in a way that equalizes inheritance, particularly if one heir is set to inherit a family business or other valuable asset. The death benefit can be allocated to other heirs, ensuring a fair distribution of wealth without dividing the business or requiring its sale.
4. Creating a Legacy through Charitable Giving
• Survivorship policies can also be structured to support charitable giving. Couples who wish to leave a portion of their wealth to charity can use the policy to create a legacy fund, with the death benefit directed to their chosen nonprofit or foundation.
Who Should Consider Survivorship Life Insurance?
Survivorship life insurance may not be suitable for everyone, but it’s a powerful tool for certain individuals and families, particularly those with:
High-Value Estates: For those concerned about estate taxes, survivorship insurance can preserve wealth and protect valuable assets from liquidation.
Special Needs Dependents: Families with special needs children can benefit from the security a survivorship policy offers, providing dedicated funds for lifelong care.
Complex Family Situations: Survivorship policies can help ensure equitable distributions among heirs, particularly for families with businesses or unique assets.
Charitable Goals: Couples with philanthropic goals can use survivorship insurance to leave a legacy for their favorite causes without impacting other heirs’ inheritance.
Conclusion
Survivorship life insurance is a versatile and cost-effective tool in estate planning, offering solutions for everything from estate taxes to special needs planning and charitable giving. By providing a substantial death benefit after the passing of both insured individuals, this type of policy can help protect and preserve wealth, ensure liquidity, and leave a lasting legacy.
If you think survivorship life insurance could benefit your estate plan, consider consulting with an estate planning attorney or financial advisor. A professional can help tailor a plan that maximizes your family’s security, supports your goals, and provides peace of mind for the future.
Contact the top-rated California trust and probate attorneys Moravec, Varga & Mooney today to schedule a telephonic consultation. Have questions, call (626) 460-1763 or email LV@MoravecsLaw.com.
Southern California Probate Lawyer Serving all counties in California, including Los Angeles, Riverside, San Bernardino, Sacramento, Santa Cruz & Beyond.
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