Lower Premiums and Higher Payouts: How Survivorship Life Insurance Policies May Help in Estate Planning

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July 23, 2021
By Andrew David Easler, Esq.

Key Takeaways:

  • Survivorship life insurance offers greater death benefits at lower costs than typical life insurance because the benefits are not paid until two or more policyholders have died.
  • Because survivorship life insurance lists someone other than the decedent’s estate as a beneficiary, this type of insurance does not need to be distributed by a court through a probate process.
  • Survivorship life insurance may not be right for those who will need the death benefits in the immediate term in order to pay off expenses after the death of their spouse

Is survivorship life insurance more advantageous for estate planning than a typical life insurance policy? The answer, in part, depends on the needs of one party upon the death of another and is typically seen in spousal relationships or business partnerships. Like typical life insurance, survivorship life insurance is a tax-free investment that provides a source of capital to beneficiaries that can be used to help pay the costs of administering the estate of someone who has passed away or to replace or supplement the lost value or earning potential of the decedent (the person who passes).[1] Such expenses may include funeral expenses, a business buy-out, or estate taxes.[2]

Often called second-to-die, last-to-die, or joint-life insurance, survivorship life insurance covers two or more policy owners in one and promises death benefit payments only once all the listed policy holders have died.[3] In contrast, a typical life insurance policy only insures one individual.

Because survivorship life insurance policies list someone other than the decedent as a beneficiary, survivorship policies are considered non-probate assets.[4] As a result, a will would not control the distribution of the property and instead the proceeds would go directly to the appointed beneficiaries.[5]

Under Florida Law, probate assets are assets that are solely owned by or in the name of the owner or that are jointly owned without rights of survivorship, including certain bank accounts, personal property, real estate,[6] or life insurance policies with no listed beneficiaries other than the insured’s estate.[7] Non-probate assets are assets that are jointly owned by two or more individuals with rights of survivorship, typically through either joint tenancy or tenancy by the entirety.

While survivorship life insurance has traditionally been used by couples anticipating very large estate taxes upon their death, other situations may merit having such a policy.[8] For instance, it is commonly used by couples to preserve their wealth beyond their lifetime, or by business partners planning the future of their enterprise after their deaths.[9]

Survivorship vs Typical Life Insurance

The most important difference between individual and survivorship life insurance policies is that, on average, the latter offers greater death benefits at lower costs as a result of lower premiums paid throughout a longer period of time.[10] These policies offer lower premiums because insurers will take into account joint life expectancy when calculating the probability of making an early payout. [11] However, the drawback to survivorship policies is that the insurance payout only comes after both spouses have passed—meaning a surviving spouse without a traditional life insurance policy who needs life insurance proceeds to cover expenses will not have any access during the remainder of the spouse’s life.

A unique benefit of survivorship life insurance is that it is more accessible because the insurer might still be willing to insure a couple when one of the planned insureds may not be the ideal candidate.[12] This is because insurers would not have to pay out until another, perhaps healthier person, dies.[13]

Married couples have traditionally used survivorship life insurance to pay their estate taxes, which can be delayed via the marital deduction of the Internal Revenue Code.[14] This deduction allows the first spouse to pass unlimited assets tax-free to the second spouse upon the first spouse’s death.[15] A survivorship life insurance policy in these cases can be used to fund the estate taxes left behind once both insured individuals have passed.[16] Because death benefits are greater for survivorship policies than if the couple had taken out two separate life insurance policies, this type of arrangement can put heirs in a better position to cover the taxes.

While survivorship life insurance helps couples better manage estate taxes, this policy can also be useful for couples with more modest assets who are interested in preserving family wealth. For example, when a married couple wishes to leave their insurance benefits to their children, this type of policy ensures that the benefits go to such beneficiaries without intervention by one of the spouses.[17] On the other hand, if the couple had separate life insurance policies, the second-to-die spouse would get access to the benefits of the first-to-die and the children would not automatically be entitled to the assets.[18]

Parents of a child with special needs who will require ongoing care beyond their lifetime may also want to take out a survivorship life insurance policy to ensure that they have adequately planned financially for their child’s future needs.[19] In such cases, Special Needs Trusts are often used to ensure that the benefits from the insurance policy go towards the child’s care once both parents have passed away.[20]

Survivorship life insurance can serve as a useful tool for estate planning, especially for couples wishing to preserve their wealth or minimize financial risk to their heirs down the road. However, it may not be the preferred choice if a surviving spouse needs to collect insurance benefits in order to pay expenses after the death of their spouse.

References:

[1] See Howard M. Zaritsky & Stephan R. Leimberg, Tax Planning With Life Insurance: Analysis With Forms 1.11(1) (1998) (providing an example where a survivorship life insurance policy could be used to buy assets from the estate of the last survivor and ensure that children end up with property free of tax liability). [2] Id. [3] Id. [4] See The Florida Bar, Important Preliminary Administration Issues § 1.2(E) (10th ed. 2020). [5] Id. [6] Note: Property subject to homestead may be a probate or non-probate asset. [7]See Office of the State Courts Administrator, Probate, Florida Courts, (last visited Jul. 13, 2021). [8] See Zaritsky, supra note 1, at 1.11(2)(a). [9] Id. at 1.11(2)(b)-(d). [10] See Howard J. Saks, Survivorship Life Insurance Products and Their Use in Estate Planning in 1994, 21 Est. Plan. 183 (1994). [11] Id. [12] Id.  [13] Id.  [14] See 26 U.S.C.A. § 2056(a). [15] Id. [16] See Zaritsky, supra note 1, at 1.11(2)(a). [17] See Howard M. Zaritsky, Tax Planning for Family Wealth Transfers at Death: Analysis With Forms 7.02(5)(a)(i) (2014). [18] Id. [19] See W. Michael Parrott, Basic Estate Planning In Florida § 2.2(b) (10th ed. 2020). [20] Id.

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