What is survivorship life insurance? If this is your first time hearing about this class of insurance, permit us to shed more light. For folks who know a little about it already, this comprehensive guide should address your unanswered questions about it.
Wealthy parents often want to give their heirs a soft financial landing, and survivorship life insurance is one way they do this. Parents seldom pass at the same time, so this policy pays out right after the second parent’s passing. That is why it is also called second-to-die insurance.
Understanding Survivorship Life Insurance
Survivorship life insurance, or second-to-die insurance, is a type of joint life insurance policy. A joint life insurance policy legally pools the resources of a couple or long-term business partners to be disbursed to heirs after the demise of the concerned parties. The second type of joint life insurance policy is the first-to-die insurance policy.
The payout period is the major difference between the first-to-die and second-to-die insurance policies. Unlike survivorship life insurance, beneficiaries of the first-to-die policy receive the payout after the demise of the first insured person.
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How Survivorship Life Insurance Works
Survivorship life insurance policies come in two flavors: permanent and term. The permanent variant requires the two insured partners to pay premiums for the rest of their lives. On the contrary, a term variant of survivorship policy is tenured, meaning the premium paid by the insured parties lasts several years. Upon expiration, the term policy needs to be renewed to remain valid.
Another peculiar attribute of the term policy is its pay-out options. At the point of application, the partners may decide that the payments should be paid out as fixed sums. Alternatively, the payout may be set to diminish over time. If the payout is intended to relieve beneficiaries of a diminishing expense like a mortgage, the decreasing term payout would fit snugly.
One thing that all the variants of survivorship life insurance have in common is the payment method. Remember, we mentioned earlier that this policy is also called second-to-die insurance. This implies that it only pays out after the passing of the second partner. In the instance of the first partner’s death, the second party is required to continue paying the premium.
When To Consider Survivorship Life Insurance
Most couples only find operating a joint life insurance policy reasonable instead of servicing two separate ones. If each spouse runs an individual life insurance policy, they would have to pay two application fees and also have to service two separate premiums. Consequently, opting for a joint insurance policy becomes a no-brainer.
However, the next roadblock arises when the couple must choose between a first-to-die insurance policy and a survivorship insurance policy. We have highlighted some situations in which survivorship insurance would be the best option.
A survivorship insurance policy is best when:
1. One of the Partners has Health Issues
If one of the insured partners is ailing, the duo may decide to start a second-to-die insurance. So, besides the recurrent medical expenses being incurred, the couple still gets to leave something behind for their heirs.
2. The Fund is Intended for an Educational or Charitable Trust
Wealthy folks often use survivorship insurance to set up a charitable trust for a beneficiary organization. Similarly, they use it as an Avenue to set up education funds for their children and grandchildren.
3. You Have a Special Needs Child
A survivorship insurance policy would be a great way to cater for the financial security of a special needs child after the parents pass away.
4. There’s a Running Estate Tax
If a couple maintains a large estate that comes with a sizable amount of recurrent tax, they may decide to help their heirs keep such an inheritance in the family by paying the tax even after their demise.
Advantages and Disadvantages of Survivorship Life Insurance
Before signing up, it is only wise to weigh the pros and cons before deciding that the policy is the right fit for your family. You don’t want to put in for an insurance policy that eventually cripples your personal finance.
1. Merits of a Second-to-Die Insurance Policy
Couples often find that survivorship life insurance costs less than paying individual premiums on two separate life insurance policies.
Also, this policy allows you to equalize the spread of inheritance to your benefitting heirs. Finally, even when one of the couple has health issues and does not qualify for conventional individual insurance, they could still qualify as part of survivorship insurance.
2. Drawbacks of a Second-to-Die Insurance Policy
The first obvious drawback is how expensive the premiums get when one of the couples has a health issue, is very old, or smokes.
Also, maintaining a second-to-die policy may be challenging when your financial circumstances are not above board. For example, after the passing of the first couple, the other gets no death benefit from the policy and still needs to continue paying the premium. Now imagine if the second partner experiences financial reverses around this time.
Finally, a divorce or a couple’s separation does not nullify a survivorship insurance policy. Premium deductions continue, irrespective.
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How Many Lives Are Covered by Survivorship Life Insurance?
If you’re still wondering: “A survivorship life insurance policy usually covers how many lives?” We can lay that to rest right now.
Traditionally, it is designed for couples and long-term partners. So, it naturally covers just two people, who are also the contributing parties.
What Is the Difference Between Joint Life Insurance and Survivorship Life Insurance?
The relationship of joint and survivorship life insurance is like that of a father to his child. Survivorship life insurance is just one of the two joint life insurance policy types.