A survivorship life insurance policy is also known as a second to die life insurance has been a favorite way to pay estate taxes that is due at the affluent people’s death since 1980. It is a life insurance policy that covers the lives of two individuals with just one policy. This policy pays a death benefit after both insureds have died. Because it does not pay out death benefit until both insured individuals have died, survivorship life insurance typically provides a much bigger death benefit than two individual policies would be able to for the same premium.
Generally, survivorship life insurance comes in 4 flavors as bellow:
Survivorship Whole Life Insurance
Survivorship whole life insurance is a kind of permanent policy that provides a life insurance benefit for both insureds’ whole life with the options to pay premiums for only couple years, 7 years, 10 years, 15 years or for the life of the policy. Obviously, premium will be higher for fewer years and lower for more years but ultimately percentage of premium will be 15% to 30% depending on the age, health, duration and number of years you choose to pay premium. Whole life also offers guaranteed cash value (like equity in your house) inside the policy with a very attractive dividend rate of return. The cash value inside the whole life policy grows tax-deferred and can be taken out anytime tax-free through a cost basis withdrawal and/or as a loan for any purpose.
Survivorship Guaranteed Universal Life
This is a kind of universal life policy where your premium is guaranteed never to increase, and as long as that guaranteed premium is paid on time, your death benefit will always be always in force. Guaranteed universal life is a fairly recent invention, and it is popular because it functions as your life-long term policy or term life policy without expiration and with fixed premiums. Currently, given the lower interest environment this kind of policy has become little bit expensive than a decade ago but still it’s a great choice. In this kind of policy, you have options to pay premiums for only couple years, 7 years, 10 years, 15 years or for the life of the policy.
Survivorship Indexed Universal Life
Survivorship indexed universal life can be guaranteed or non-guaranteed with an option to tie your return to a major stock market index like the S&P 500, DJIA, NASDAQ 100, EURO STIXX 50, Bloomberg Barclay U.S. Aggregate Bond and some proprietary institutional grade dynamic indices. Interest crediting goes up and down in lockstep with the selected index or various indices. New guaranteed indexed universal life is a much better option as it provides an opportunity to earn a better interest rate with few guarantees. Similar to earlier two, you have option to pay premiums for only couple years, 7 years, 10 years, 15 years or for the life of the policy.
Survivorship Variable Universal Life
The survivorship variable universal life is very similar to non-guaranteed indexed universal life. In this policy, you can invest in the stock market (mainly various kinds of mutual funds) directly rather than just to tie to a stock market index as the case with index universal life. The investment inside the variable universal life insurance policy is called separate accounts. You can invest and manage a variety of mutual funds inside the policy, and the performance of a VUL policy will depend on the performance of these mutual funds. The variable universal life insurance (VUL) policy has all the drawbacks of non-guaranteed universal life insurance policies and should be avoided for the survivorship or second-to-die life insurance need.
The second to die life insurance policy is the most appropriate for individuals who would only need to pass along their death benefit upon the death of second spouse. Here are a few special scenarios that make second to die life insurance coverage especially appealing:
- A couple that has a special needs child who they wish to provide for financially after they both gone.
- A couple that is concerned about the high premium of individual coverage because one of the proposed insured may be not in optimal health.
- A business owner or partners that are looking to provide funds for the business in the event that both partners die (whether the funds are used to pay liquidation expenses or to help keep the business operating until it can be sold).
- A couple who is looking for a financial vehicle to fund their estate taxes liabilities or provide an inheritance upon the second death.
Survivorship policies are most commonly used by wealthy couples as a mechanism to provide their estate with liquid assets and minimize the impact of estate taxes to their heirs.
Under current law, married couples don’t need to worry about estate taxes after the first spouse passes away as long as passing spouse is a US citizen, because the marital deduction allows the first to die to pass unlimited assets (all property included in their gross estate) along to the surviving spouse tax-free.
Estate taxes, however, are due after the death of the second spouse on assets that exceed the federal estate and gift tax exemption amount, which is $11.58 million per individual for 2020. (Married couples can shield $23 million from federal estate and gift taxes.)
Currently, the top federal estate tax rate is 40 percent, which can take a big bite out of the financial legacy wealthy families leave behind.
Take note that some states (12, plus the District of Columbia) levy their own estate tax, and six have an inheritance tax, which often imposes tax on much smaller estates.
So where do second-to-die policies come in? They can potentially provide the liquidity — or immediately available cash flow — to pay the administrative costs and estate taxes due on your estate when both you and your spouse are gone. That assumes, of course, that the death benefit is sufficient to pay what is owed, and that the policy is still in force when the second spouse dies.
Absent a life insurance death benefit, their next of kin might otherwise be forced to sell their inheritance (art work, stock investments, real estate) at a fire-sale price to raise money quickly. Life insurance proceeds pass directly to the policyowners’ beneficiaries, avoiding the expense and delay of probate.
If you like this article and need survivorship life insurance policy then love to help you. As you know now there are various kinds of second to die life insurance policies like whole life, guaranteed universal life and indexed universal life. There is no one-size-fits-all survivorship policy. The type of insurance policy that is appropriate for you depends on your individual scenario. Call (877) 972-3262 or complete contact us to speak Neil Jesani, CFP. Insurance, Investment and wealth creation are much harder than most people think or even understand. We have been helping more 3000 physicians, 1000 dentists, 3000 successful business owners and 600 independent pharmacy owners create most optimal asset allocation, reduce income and estate taxes and create sizable wealth for last 20 years. We don’t have magic wand but we know thing or two that works. We might be able to help you buy sizable survivorship life insurance with a very minimal out of pocket if you meet certain criteria.