Who Should Have Survivorship (Joint) Life Insurance?
What is Survivorship Life Insurance?
Survivorship life insurance is a type of joint life insurance.
Essentially, it covers two people.
On that note:
It only pays out when both people pass away during the policy period.
Other joint life insurance policies may pay out when the first person on the joint insurance policy dies.
This is called first-to-die joint life insurance. It is not the same as survivorship life insurance.
When you apply for a survivorship life insurance policy, you have to specify which type of life insurance you want.
Most people choose permanent life insurance policies, such as universal life insurance, for survivorship life insurance. Term life insurance is also an option.
Permanent survivorship life insurance
Permanent survivorship life insurance stays in effect until both people die. At that time, it pays out the death benefit.
This assumes you continue paying premiums and follow the policy’s rules.
Term survivorship life insurance
Term survivorship life insurance would only pay out if both people die during the term of the policy.
If no one dies or only one person dies during the term, there would be no death benefit payout.
Because of how survivorship life insurance works and the types of policies that can be issued, it sometimes goes by other names.
These can include:
- Second-to-die life insurance
- Variable survivorship life insurance
How Survivorship Life Insurance Works
Getting survivorship life insurance is a somewhat different process than individual life insurance.
Rather than have one person apply, two people apply.
Usually, this is you and your spouse.
Personal info and medical exams
The life insurance company will collect personal information.
For instance, they may ask about both people’s health history, age and current medical information.
Once the policy is issued, you’re covered. The next difference comes when the first person, usually your spouse, dies.
Under individual life insurance policies, this would trigger a death benefit payout.
With a survivorship life insurance policy, it doesn’t.
The death benefit will only be paid out when both individuals on the policy have passed away. Of course, this assumes the policy is in effect.
Why Survivorship Life Insurance Is Cheaper
What may surprise some people is survivorship life insurance may be cheaper than individual life insurance.
Not only is it cheaper than two individual policies, but it may be cheaper than a single life insurance policy.
Less risk for insurers
When you think about how joint life insurance works, this makes sense.
First, two people have to die for the policy to pay the death benefit.
This lowers the risk of a payout for term life policies. It extends how long the life insurance company gets to hold on to premium payments for permanent life insurance policies.
Another major factor in pricing life insurance is the insured people’s health.
If one person is in bad health, their premiums will be higher with a standard policy.
Since both people have to die for survivorship life insurance to pay out, a healthy spouse could dramatically lower your rates.
When It May Be a Good Fit
Survivorship life insurance may not seem like a good fit for most traditional life insurance uses.
That said, it does have some specific benefits.
It can help enormously in certain situations.
Providing money for a dependent
If you need to leave a legacy for your dependent, this type of policy can help.
Usually, this is crucial when a child has special needs. In this case, someone may need to be paid to take over the responsibilities when parents die.
Care for specialized conditions can be outrageously expensive. By purchasing a survivorship life insurance policy, your beneficiary gets a payout when both parents die.
This can help cover these costs if the child cannot earn money themselves.
You’d likely need to do some estate planning.
Children may not be able to manage their own money. Estate attornies can help you figure out the best solution for your situation.
Estate and income tax planning
High wealth individuals could end up being subject to the estate tax when they die.
Heirs may have trouble figuring out how to pay these expensive taxes. Survivorship life insurance policy can help solve this problem.
The payout can be used to help pay the estate taxes due.
This way, the heirs don’t have to try to decide what assets to sell to pay the federal taxes on their own.
If this is your plan, consult an estate planning attorney and financial planner. They can help set up the policy in the correct trust to avoid estate taxes on the death benefit.
Someone can’t get life insurance on their own
A person’s health or pre-existing conditions may make it near impossible to get a standard life insurance policy.
In this case, the person may be able to be covered under a survivorship life insurance policy.
If the person who can’t get insurance applies with someone in good health, they may get accepted.
The issue is both people need to die for the policy to pay out. It works if a freak accident occurs and the healthy person passes away first. In this case, the policy would continue to cover the person that couldn’t get insurance.
Unfortunately, the survivorship policy doesn’t always help.
It provides the same type of coverage the healthy person could have purchased on their own if the uncoverable person passes away first.
When to Avoid It
These life insurance policies aren’t always a good fit.
Not for replacing spousal income
If the surviving spouse would need a life insurance payout to replace the dead spouse’s income, this isn’t the policy type for you.
There’s no death benefit payment when the first person dies.
These policies can get tricky if the relationship ends between the people the policy covers.
When you’re in a committed relationship, the premiums come out of the family budget.
If that relationship ends, premium payments would still need to be made. Otherwise, the insurance would lapse.
Deciding who pays how much could cause even more stress. Additional stress is the last thing you need at a difficult point in your life.
How to Choose Between Traditional and Survivorship Life Insurance
Deciding whether traditional or survivorship life insurance is better for you is pretty straightforward.
Survivorship or traditional life insurance
First, evaluate why you’re purchasing life insurance.
Do you need to provide your spouse with money to survive after you pass away?
If so, traditional life insurance is a better fit.
Do you want to provide for someone other than your spouse after you both die? If so, survivorship life insurance may be the better option.
The key is figuring out when you need the money to be paid out.
If you can wait for the death benefit to be paid until after both people pass away, survivorship life insurance could be more cost-effective.
If the death benefit is needed when the first person passes away, traditional life insurance is the way to go.
Survivorship term or permanent life insurance
You need to pick term or permanent life insurance if you decide survivorship life insurance is what you want.
Term life insurance will only cover you until the term expires. Because both people need to die during the term to pay a death benefit, the chances of this happening are likely low.
Usually, people purchasing survivorship life insurance have a specific long-term need that must be met after both people die. If you both live until your 80s, a 30-year term life insurance policy bought at age 25 won’t pay a death benefit.
Permanent life insurance can cover this need. Permanent life insurance is more expensive.
You both still have to pass away, but the death benefit gets paid as long as you keep the policy in effect.
This makes sense for special needs children that need money to cover care costs after both parents die.
Consult an Expert That’s on Your Side
As always, you should consult an expert when making major financial decisions.
A life insurance company pays insurance salespeople commissions for selling their financial products and services.
This can create a conflict of interest. Salespeople may recommend more expensive policies that pay higher commissions.
If you want an honest opinion, consider hiring a fee-only fiduciary financial planner. You have to pay these advisors for their time but they don’t get paid commissions. This way, you have an unbiased answer based on your specific situation on which insurance benefits you need.
These professionals may be able to provide tax or legal advice for more complex situations.
For instance, they may be able to help you set up a special needs trust or strategize on other estate planning issues. If they can’t, they can refer you to someone that can.