Joint survivorship life insurance is a specialized policy that insures two individuals, commonly spouses, and pays out after both have passed away. Designed primarily for long-term financial and estate planning, this type of insurance can be a strategic tool for managing shared assets and mitigating estate taxes. It primarily benefits couples aiming to establish a legacy or navigate complex financial legacies, making it a policy to consider in comprehensive financial planning.
Joint Survivorship Life Insurance
Updated: November 17, 2024
Advertising & Editorial Disclosure
Key Takeaways
Joint survivorship life insurance insures two lives, paying out after both pass away, and policyholders often use it for estate planning.
Joint survivorship life insurance may offer lower premiums than individual policies but lacks immediate benefits for the surviving insured.
It is particularly suitable for couples with substantial assets and estate tax concerns but may not be ideal in all situations.
Understanding Joint Survivorship Life Insurance
Joint survivorship life insurance, or second-to-die life insurance, covers two individuals, typically a married couple, and pays the death benefit only after both parties have passed away. This contrasts with standard life insurance policies, where the insurer pays the benefit following the insured person’s death.
A joint survivorship life insurance policy focuses on long-term financial objectives, making it a strategic choice for couples looking to manage estate taxes and create lasting legacies. In terms of cost, second-to-die life insurance policies often present a more economical option than purchasing two individual life insurance policies. The premium of a survivorship life policy is typically lower as the risk to the insurer is deferred until the second insured’s death. This insurance type often aligns with comprehensive estate planning, offering a nuanced approach to managing future financial legacies.
JOINT SURVIVORSHIP LIFE INSURANCE EXAMPLE
Suppose a married couple owns a permanent policy that covers both of their lives. They opt for the type of multiple protection coverage that pays on the death of the last person, purchasing a joint survivorship life insurance policy. This setup ensures that the death benefit is only disbursed after both have passed away, thereby supporting long-term financial planning and legacy building.
If one spouse passes away, the policy does not pay out immediately. Instead, it remains in force until the death of the surviving spouse. Once both are deceased, their chosen beneficiaries receive the death benefit.
MONEYGEEK DICTIONARY
A joint survivorship life insurance policy may also be called last-survivor life insurance or last-to-die insurance policy. These terms highlight the policy's distinctive feature: the benefit is only paid after the last insured individual has passed away.
Survivorship vs. First-to-Die
Joint life insurance is a shared life insurance policy that covers two individuals under a single contract. It is an umbrella term that includes two distinct types of dual life insurance: survivorship and first-to-die life insurance.
Survivorship life insurance delays the death benefit payment until both insured policyholders die. This approach is optimal for those focusing on long-term estate planning and legacy building, as it provides significant benefits for future financial needs. In contrast, first-to-die life insurance offers a death benefit after the first insured individual passes away, providing immediate financial support to the surviving insured.
Joint life insurance is a life insurance policy written on one contract for two. The distinction in benefit payout timing reflects the differing objectives of the two types: immediate financial assistance with first-to-die life insurance versus future financial security and estate planning with survivorship life insurance.
Joint Survivorship Life Insurance Tax Implications
One of the critical advantages of joint survivorship life insurance is the potential for estate tax reduction. Since the policy pays out after the second insured's death, the death benefit is often excluded from the estate of the first to die, potentially lowering the taxable estate value. This deferral can result in substantial tax savings, especially for estates subject to high taxes.
Additionally, if an irrevocable life insurance trust owns the policy, the death benefit can be excluded entirely from the taxable estate of both insured parties, further enhancing its tax efficiency.
Policyholders should be aware that the premiums of a survivorship life policy are not tax-deductible, and the policy's cash value may have tax implications if accessed during the insured's lifetime. As tax laws can change over time, consulting with a tax professional is advisable to understand and navigate these implications.
Types of Joint Survivorship Life Insurance
Joint survivorship life insurance comes in various forms, from term to permanent life insurance policies. These options cater to a wide range of planning strategies, from short-term coverage to long-term estate planning.
Term Life Insurance
Term life insurance provides coverage for a specific period, making it a practical choice for those needing temporary protection or are mindful of budget constraints. It is a straightforward policy without a cash value component, offering a defined benefit for a set duration, making it suitable for short-term estate plans or as a cost-effective way to ensure financial security.
Whole Life Insurance
This form of permanent insurance offers lifetime coverage and a cash value accumulation feature. Whole life insurance is well-suited for individuals who require long-term financial security and are interested in building an asset that grows tax-deferred over time. It provides a consistent premium and a guaranteed death benefit, making it a reliable option for comprehensive estate planning.
Universal Life Insurance
A universal life insurance policy, known for its flexibility, allows adjustable premium payments and death benefits. This policy is ideal for individuals with varying financial situations, offering the ability to increase or decrease coverage as needs change. The policy also includes a cash value component that can grow based on the prevailing interest rates, adding an element of financial planning versatility.
Variable Life Insurance
A variable life insurance policy offers adjustable investment options that can increase the policy's cash value, but it also comes with higher risk. This policy type allows policyholders to invest in various funds tied to the stock market, providing the potential for higher returns. It’s suited for those comfortable with investment risk and looking for an opportunity to enhance their estate's value through life insurance.
Choosing the right type of joint survivorship life insurance depends on your financial goals and risk tolerance. Note that survivorship life insurance rates may vary significantly based on the type of policy selected, reflecting the coverage, benefits and investment opportunities each offers.
Pros and Cons of Joint Survivorship Life Insurance
Understanding the pros and cons of second-to-die life insurance will help you make an informed financial decision.
pros
Affordability: Generally more cost-effective than maintaining two individual life insurance plans, this policy type offers financial efficiency for couples.
Estate Planning Tool: These policies are ideal for managing wealth transfer and funding trusts, ensuring a robust financial legacy after both insured parties pass.
Tax Benefits: The policy structure can contribute to reducing estate taxes, providing a financial advantage to heirs and beneficiaries.
cons
Benefit Postponement: This policy type does not provide immediate financial support after the first partner's death, which could be concerning for some.
Limited Suitability: Its benefits are not universally applicable, particularly for consumers requiring immediate life insurance benefits or having distinct individual insurance needs.
Who Should Buy Joint Survivorship Life Insurance
Your circumstances, financial goals and needs play a pivotal role in determining the suitability of joint survivorship life insurance.
Joint Survivorship Life Insurance Best Suits These Profiles:
- Couples with High-Value Estates: These policies are best suited for those with large estates looking to streamline wealth transfer and minimize estate taxes.
- Long-Term Legacy Creators: This insurance is ideal for individuals focused on leaving a significant legacy, whether to family or through charitable contributions.
- Those With Special Needs Dependents: Joint survivorship insurance is beneficial for couples with dependents who have special needs, ensuring long-term financial support.
Joint Survivorship Life Insurance May Not Suit These Profiles:
- Those Needing Immediate Survivor Benefits: These policies may not be ideal for consumers requiring swift financial support for the surviving partner upon the first death.
- Couples With Significantly Different Health Profiles: This insurance is less suitable when one partner has a considerably different health outlook, where individual policies might offer more tailored benefits.
- Those With Limited Estate Planning or Legacy Concerns: Joint survivorship insurance may not be necessary for couples with minimal estate planning needs or smaller estates not subject to significant estate taxes.
How to Get a Joint Survivorship Life Insurance Policy
Securing a joint survivorship life insurance policy involves several key steps to ensure you select the right coverage that aligns with your goals.
- 1
Evaluate Your Financial Goals
Consider how a joint survivorship policy can support your estate planning and legacy goals. This step is important for understanding how this type of insurance can integrate into your broader financial planning strategy.
- 2
Compare Policies and Rates
Research different policies to compare second-to-die life insurance rates. This comparison will help you find a policy that offers the best value for the coverage you need, balancing cost with the scope of benefits.
- 3
Consult Financial and Legal Advisors (Optional)
Discuss your options with financial and legal advisors to ensure the policy fits your estate and financial plans. Advisors can provide valuable insights into how survivorship life policy premiums affect your finances and tax implications.
- 4
Apply for the Policy
Once you've chosen a provider, apply for the policy. This step typically involves filling out an application and undergoing a medical exam, if required, to determine your eligibility and premium rates.
- 5
Review and Adjust as Needed
After purchasing the policy, regularly review it with your advisor to ensure it continues to meet your needs, especially if your financial situation or estate planning objectives change.
Understanding the purchasing process can help you effectively integrate survivorship life insurance into your estate planning, ensuring long-term benefits for your loved ones.
Joint Survivorship Life Insurance Alternatives
While joint survivorship life insurance fits specific scenarios, other options may align better with different needs. We explore these below:
Individual Life Insurance
Getting individual life insurance policies provides immediate benefits upon the policyholder's death. This option is tailored to individual needs and allows for customizable coverage amounts and term lengths, making it a versatile choice for those seeking financial protection for their dependents without the complexities of joint coverage.
First-to-Die Life Insurance
This type of joint life insurance is suitable for couples who require prompt financial support following a partner's death. This policy ensures that the surviving spouse receives the death benefit immediately, offering a financial cushion during a difficult transition period. It is particularly suitable for couples with dependent children or significant shared debts.
Trusts and Estate Planning Tools
These are non-insurance methods for managing assets and ensuring distribution according to one's wishes. Setting up a trust offers a high degree of control over when and how to disburse assets, potentially providing tax benefits and protecting assets from legal disputes. They can be an integral part of a comprehensive estate plan, either in conjunction with or in place of life insurance.
FAQ About Joint Survivorship Life Insurance
MoneyGeek answers some common questions to help clarify how joint survivorship life insurance operates and its potential role in financial planning.
What is survivorship life insurance?
A survivorship life insurance policy, also known as joint survivorship life insurance, is designed to insure two individuals in one policy and pay out the benefit only after both insured parties have passed away.
What is the primary purpose of joint survivorship life insurance?
Joint survivorship life insurance primarily suits estate planning. It ensures a considerable payout to beneficiaries after the demise of both insured individuals, facilitating wealth transfer and providing tax benefits.
How does joint survivorship life insurance affect estate taxes?
The policy defers the death benefit until after the second insured's death, which can significantly mitigate the estate tax burden. This strategy is particularly useful for those with larger estates, as it can lead to substantial tax savings.
How are survivorship life insurance policies helpful in estate planning?
These policies can play a vital role in estate planning by providing a large lump sum to beneficiaries upon the second insured's death. You can strategically use this for paying off estate taxes, funding trusts or ensuring that heirs receive a substantial inheritance without the immediate tax liabilities that might come with a single-insured policy.
Can you alter the policy terms of joint survivorship life insurance?
Modifying the policy terms, such as beneficiaries and coverage amounts, is often possible. However, making changes may require consulting with the insurance provider or a financial advisor, as each alteration may have specific implications.
Can an individual purchase joint survivorship life insurance?
Joint survivorship life insurance is exclusively for two individuals, commonly spouses, and is unavailable to individuals. Its structure and benefits seek to meet the needs of couples, particularly in the context of shared assets and estate planning.
What type of life policy covers two lives and pays the face amount after the first one dies?
A first-to-die joint life policy covers two lives and pays out the policy's face amount after the first insured person dies, providing financial support to the surviving individual.
What type of life policy covers two people and pays upon the death of the last insured?
The type of policy that pays on the death of the last person is called a joint survivorship or second-to-die life insurance policy. It covers two people and disburses the benefit after both insured individuals have passed away.
About Mark Fitzpatrick
Mark Fitzpatrick is a Licensed Property and Casualty Insurance Producer and MoneyGeek's Head of Insurance. He has analyzed the insurance market for over five years, conducting original research and creating personalized content for every kind of buyer. He has been quoted in several insurance-related publications, including CNBC, NBC News and Mashable.
Fitzpatrick earned a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He is passionate about using his knowledge of economics and insurance to bring transparency around financial topics and help others feel confident in their money moves.