At I&E, we focus on combining both the benefits of a properly designed permanent life insurance policy with a properly designed estate plan. The benefit is a tailored asset protection plan, that builds wealth and leaves a legacy. One such tool to accomplish this goal is through the use of a second to die insurance policy, also known as survivorship life insurance.
What is Survivorship Life Insurance?
Survivorship life insurance DEFINITION: also known as a Second to Die policy, it is simply a type of joint permanent life insurance that pays out upon the death of both insured parties. Typically this type of joint insurance is on a husband and wife, and the policy death benefit is paid only after both die. However, it is possible to insure more than two people, say for example in the case of some key employees. In such a case, the joint insurance policy would pay a death benefit after the last insured dies.
For many people that are new to this type of permanent life insurance, it may seem a little counter-intuitive to only pay after BOTH people have died. And honestly it’s true that in many situations this type of insurance is not the most suitable.
However, there are situations in which a second to die policy provides the perfect solution to an otherwise challenging problem. Let’s take a look at who would benefit the most from a second to die life insurance policy.
Who needs Survivorship Life Insurance?
If you’re a high net worth family, and you know your heirs will be hit with heavy estate taxes. Or even if you think it slightly possible that your heirs will be hit with the estate tax, you are an ideal candidate for survivorship insurance.
A second-to-die life insurance policy will help pay estate taxes for a very low comparative cost. In other words, it’s a great value for those that think they might have to pay the estate tax.
What Exactly is the Estate Tax?
The federal government has a set limit on family estates that are passed down to the heirs. If the estate is below the exemption limit, the heirs do not have to pay the estate tax. For the amounts over the exemption limit, the estate tax is assessed.
This exclusion limit is important because the estate tax is rather heavy, currently at 40%, but it has been as high as 55% since 2000. The exclusion limit itself has also fluctuated quite a bit and is currently at $11.2 million. But the exclusion was only $675k in 2001, so it’s not something to take for granted.
So currently, if your entire taxable estate is less than $11.2 million and your children inherit it, they will not be required to pay the estate tax.
In addition to those that have high net worth, those that have a desire to pass on a significant legacy to their heirs or to a charity would also benefit from a second to die policy. In fact, there are some who consider survivorship life insurance to be one of the best ways to build substantial wealth, because the risk is relatively low and the reward can be significant.
Pros of Survivorship Life Insurance
We have written extensively on whole life insurance pros and cons. Here we want to focus specifically on survivorship life insurance pros and cons, starting with the pros.
One benefit of all life insurance is that the death benefit is paid federal income tax free to the beneficiaries. We do not have this benefit listed in our pro below that focuses exclusively on the pros and cons of second to die insurance, but it is worth mentioning at the outset.
1. Less expensive
Survivorship life insurance is almost always cheaper than insuring the same two individuals with individual single policies. Due to the fact that the life insurance policy does not pay out until both the insured individuals die, the risk for the insurance company is statistically less — as a result, the premium paid for the second to die policy is cheaper.
Let me give you an example to make it more clear. This example happens to be a very high benefit and premium, but the principle is the same regardless of the numbers used. A husband and wife just under 70 years of age insured for $4 million individually via a whole life insurance policy had premium payments of roughly $94,000 and $82,000 annually. It’s a high premium, but they are both likely to die within 20 years, and they both have a guaranteed $4 million death benefit. The combined premium for the two is a whopping $176,000 annually! Very few people can afford this kind of insurance. But keep in mind that they were likely to get $8 million within 20 years.
For the same husband and wife to purchase survivorship insurance for $4 million, the policy premium was roughly $54,000 annually. Now it’s true that the death benefit on both is only $4 million compared to $8 million with the two policies, but as you can see the price is significantly less than even insuring one of them for $4 million. In fact, that’s about a 40% savings for the same death benefit!
Survivorship insurance doesn’t typically provide for the surviving spouse, so it’s not a tool to be considered if that is a need. But for those that want to pass on a legacy to their children, the cost makes this type of insurance very attractive.
In many situations, the children of elderly parents split the cost of survivorship life insurance among all the heirs, so as to mitigate the cost while securing a rather substantial death benefit. Consider the example above and a family of 5 grown children. If each family was willing to pay $11,000 annually in premiums, they would each be individually guaranteed a payout of nearly $800,000 tax-free within approximately 20 years. That’s a pretty good rate of return even if it goes 25 years.
2. Easier to Qualify
As mentioned earlier, due to the fact that two lives are insured instead of just one, it is less risky for the life insurance company. We mentioned this results in a lower price, but it also means that the life insurance underwriting process (the process which determines if you qualify) is usually easier. The insurance company will usually focus on the youngest or healthiest of the two insured individuals. This is good news for those that may be considered to be uninsurable because of their medical history or some other predicament, because the life insurance company will still include them in the policy.
The fact that an uninsured is able to be included may not seem like a big deal at first, but remember that the cost to insure both is likely much less than insuring even the one individual healthy person. A premium for a healthy individual may be $10,000 a year, but insuring that same individual along with a second individual that is in poor health and is uninsurable, may be 30-40% lower annually. That means that the uninsured individual acts as a discount for the other (because the probability is that the uninsurable person is likely to die first).
3. Estate Security
If your estate is likely to be impacted by taxes in such a way as to diminish the overall stability of the estate, insurance may be able to help. For those that have a high net worth, they may have property, business interest, and investments that are all taxable when inherited. In addition, the estate tax may seriously impact the total value of the estate as a whole.
Additionally, if cash flow (i.e. access to liquid money) is an issue, say for a large estate that is made of primarily of real property, the quick influx of money can be an estate saver.
How Does Survivorship Insurance Help?
In a typical scenario a high net worth family will purchase survivorship insurance via a Irrevocable Life Insurance Trust (ILIT). The trust is the owner of the life insurance and the heirs are granted the typical rights associated with a family trust. When the insured individuals die, the life insurance company pays the trust the death benefit. This allows the death benefit to be controlled by the trust and ensures that it is not considered part of the estate or inheritance.
The above reasons are probably the two biggest reasons why survivorship life insurance is used for high net worth families. The uncertainty of the estate tax law means that families will desire to hedge their bets, in a manner of speaking, in order to avoid or mitigate the estate tax consequences. And having immediate liquidity in the form of a lump sum death benefit avoids having to sell off assets in order to raise cash.
4. Estate Building
In the example above we saw a family of five children buying survivorship insurance for their parents. Some families choose to do this sort of thing in order to create a substantial estate for all the beneficiaries involved.
In addition, some couples will choose to buy single premium survivorship life insurance because they are completely paid up and know they are securing a legacy for their children.
Also, there might be a need for specific special needs planning with life insurance in order that a child with special needs is protected financially upon the death of both parents.
Single premium life insurance often offers the best return because you are handing over a large sum of money to the life insurance company up front. The trade-off is that you are guaranteed a substantial death benefit for the heirs when both insured individuals die, and there is no worry about the policy lapsing.
For those families that are not relying on the entirety of the death benefit inheritance to secure their future, they can choose to take a large portion of the proceeds from the death benefit and turn around and use it to buy another survivorship policy.
In other words, adult heirs that inherit a few million when their parents pass away, can use 25%-50% of their inheritance to buy another single premium policy on themselves, so their future beneficiaries (e.g. children or charities) can have an even greater inheritance.
Some families actually map out a plan for ever increasing policies on subsequent generations using the proceeds of each death benefit. It may seem trivial, but by following the plan, a family can accrue tens of millions of dollars in just 3 generations.
5. Estate Equality
Finally, there is another pro to survivorship insurance that may seem a bit obscure but can really come in handy when needed. If a family is in need of a family owned business succession plan because the family business will one day be run by only one of the children after the insured dies, it’s possible that they will want to leave all of the company to the child running the family business, but still provide something significant for other children that are not involved.
With a second to die life insurance policy the family can choose to split up the family estate in such a way as to ensure the children are all equally compensated as heirs, but yet given significantly different assets based on their interests and strengths.
And what may be even more important, the family business is able to stay in the family and in tact without the worry of selling it off at fire-sale prices just to divide the proceeds equally among the heirs.
6. Estate Preservation
The chances of either you or your spouse needing long-term care services are above 50%. The number is probably much higher as people are living longer than ever. And the price for long term care services are climbing at a higher rate than inflation. As a result, many people are looking beyond the stand alone long term care insurance to new hybrid long term care life insurance policies.
And many of these policies allow both spouses to have access to the same pool of benefits. That way, if one spouse needs additional care after his or her benefits run out, they can tap into the other spouse’s long term care benefit.
Cons of Survivorship Life Insurance
The pros to survivorship life insurance are pretty compelling for those that may be in the right situation in life, but there are still some cons to consider as well.
1. No payout until second death
First and foremost, and it is probably obvious to all, the major con of survivorship life insurance is that there isn’t any death benefit until both insured parties have died. In other words, this is not the financial tool to safeguard your income for your spouse, and it could actually be a substantial burden on your spouse if the surviving spouse has an impaired ability to pay the premiums.
This is the number one reason why you don’t see the majority of married couples buying survivorship life insurance. Because this type of policy doesn’t provide for your spouse. In fact, it can be a burden as mentioned earlier.
However, it is true that all permanent life insurance policies may be sold. So don’t assume that the only option for the surviving spouse is to allow the policy to lapse. Those that specialize in life settlements (also known as viatical settlements) will be happy to buy your policy at a price that is usually much better than the price the insurance company is willing to give you (the cash surrender value).
2. Marital changes could impact premium payment
It may seem like an impossibility when the policy was put in place, but life happens and marital changes may occur. If they do, the policy is not going to change, so you may want to keep that in mind.
So, if a couple has a survivorship policy and later decides to divorce, the policy is still in place, and premiums will still have to be paid. If one person dies, and the survivor decides to remarry, the premiums still need to be paid. In some situations the new spouse may not be too excited about paying premiums on a policy that doesn’t benefit their own heirs.
3. Not cash value growth focused
We are huge proponents of cash value life insurance. However, with survivorship second to die life insurance the focus is not on cash value accumulation but rather, you are looking for the largest death benefit. Which is great. That is the beauty of a diversified portfolio, you have a different product for a specific goal and purpose.
But don’t sell yourself short and miss an opportunity to do both. Using cash value life insurance from a mutual insurance company to practice infinite banking should be an additional tool to consider for your wealth building toolbox.
Second to Die Life Insurance Rates
If you’re looking to get some specific life insurance rates we’d love to help you out, so don’t hesitate to call for a free quote. But just to give you an idea of how this product can work for a married couple that doesn’t smoke, we’ve put a chart below with some approximate numbers. For each couple the prices will vary depending on medical history and current health, but the chart below will provide some general numbers based on some of the top insurance providers available today.
Also keep in mind that the premiums and all the associated discussion thus far have been about whole life or permanent life insurance. It is also possible to purchase term survivorship insurance, but it’s not nearly as popular due to the fact that it is typically priced much more closely to whole life (because it is much more likely to pay the death benefit) and because the lack of a guaranteed pay out means that there is additional risk.
The ages column below represents two individuals at the same age. The Guaranteed level annual premium is the annual payment required to secure the$1,000,000 death benefit. If the insured so chooses, they can opt to pay a single premium instead of paying the annual premiums. Obviously the single premium is much more, but it is guaranteeing that the death benefit will be paid. In this case the insured is buying a form of paid-up insurance, because the death benefit is guaranteed and there are no further premium obligations.
The following sample survivorship life insurance quotes are based on non-smoker preferred best rate class. All rates are for educational purposes only and are not guaranteed. All life insurance rates must be qualified for.
|Ages||Guaranteed Level Annual Premium||One Pay Single Premium||Death Benefit|
The above survivorship life insurance quotes from A- rated carriers and above.
There isn’t any one financial solution that suits all needs, so it pays to be informed and educated when it comes to the various financial products available. The survivorship life insurance policy is just one of the many life insurance products available that can really help families ensure that their loved ones are provided for in the coming years. It is specially suited to meet the needs of high net worth families that are looking to avoid or mitigate the estate tax. And it is a fantastic tool for families that want to build a legacy estate that will provide for generations to come.