Survivorship life insurance (also known as “second-to-die”) can be an important vehicle to consider for estate planning in the right cases.
This type of insurance policy covers two lives and pays out the proceeds when the second insured dies.
One benefit is that the premium tends to be lower than it would be for two separate policies because the life expectancy is based on the two insureds’ combined ages and the insurer has lower administrative costs.
As a result, these policies typically provide a much higher face value than you would obtain for an individual for the same premium cost. This sort of policy can be used for a married couple, though it can be used for any pair of people, such as a parent and child or even two business partners.
For planning purposes, when the life insurance pays out on the second death it can be used to cover any estate tax payments. It can also be a good option for a couple with a modest income that wants to ensure some amount of an inheritance for their children.
Often, an irrevocable life insurance trust is set up to buy the policy. That way, the trustee pays the premiums and manages the terms of the trust. You provide the funding as the grantor of the trust and can make gifts to the trust to pay the premiums. Using the trust as the owner keeps the death benefits paid from the policy out of the survivor’s estate when he or she dies and retained in the trust for the benefit of the heirs.
Keep in mind that when the first spouse dies, the surviving spouse has to be able to afford to continue paying the premiums.
Also, if a couple has a survivorship policy and gets divorced, you may want to divide it in two if the carrier allows this, with each spouse owning half of the initial face value.
Deciding whether survivorship life insurance is a beneficial estate planning vehicle for you is complicated and should be evaluated on a case-by-case basis, with the advice of an attorney.