Many life insurance policies insure one person. When that policyholder passes away, it pays out the death benefit to their beneficiaries. On the other hand, survivorship policies cover two people. Benefits are paid to beneficiaries after both individuals have died, so these are sometimes called "second-to-die" policies.

It may take longer before the beneficiaries can receive the benefits, but survivorship policies can offer coverage for less than the cost of getting two individual policies. As a result, they offer some unique advantages. This article will dive into four distinct benefits survivorship life insurance can provide policyholders and their loved ones.

1. It can help with estate planning

In the U.S., after both parents die, they may owe estate taxes if their estate is large enough. Additionally, states may charge their own estate or other taxes. As a result, the government can take a large chunk of wealth, leaving less for the couple's heirs.

Survivorship life insurance can be beneficial for estate planning because the death benefit is generally tax-free. A couple can invest in a survivorship policy to provide a substantial amount of tax-free income to their heirs.

2. It can help with business succession planning

Similar to estate planning, survivorship life insurance can be a good tool for business partners who need to transfer their interest in the company when they pass away. When both insured partners die, this policy provides the beneficiaries with substantial tax-free funds to cover business expenses. Alternatively, it may provide heirs financial security they need to purchase the business interest and work in the business full-time.

3. It can help get around health or age issues

According to a recent LIMRA study, 16% of uninsured people said they don't have life insurance because they think they wouldn't qualify for coverage. Health problems and older age are primary reasons insurers may deny some life insurance applicants or charge them higher premiums if approved. Survivorship life insurance offers a workaround. For instance, one spouse may be older or have health issues, while the other is younger and healthy. Getting a survivorship policy can increase approval chances and help the policyholders lock in lower premiums.

4. It can provide for permanent dependents

Some applicants may have dependents who rely on them permanently, such as a child with disabilities. A survivorship policy can make sure their child has the financial support they need if both parents pass away.

Applicants typically can't name their minor child as a beneficiary, but they can create a trust and name it the beneficiary. This trust can then manage the death benefit to ensure their child is taken care of.

The bottom line

Survivorship life insurance policies can be excellent tools for estate and business succession planning, especially for high-net-worth individuals and families. Additionally, it can provide for permanent dependents, such as children with disabilities, and help couples get a policy in spite of health issues or age.

That said, remember that these policies only pay out the death benefit when both policyholders pass away. So, policyholders should evaluate their financial situation and ensure one policyholder can continue to support their family in the other's absence before getting one of these policies.

Contact: michael.bertini@iquanti.com