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Survivorship Life Insurance Defined

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Survivorship life insurance is a policy that pays only upon the death of two people. Survivorship life insurance is most often purchased for spouse. The premiums may be lower since two people are insured instead of one, however the benefit pays only when the second person passes away.

How Does Survivorship Life Insurance Work

When you purchase a survivorship life insurance policy, premiums are based on the statistical likelihood of both parties dying. When one person listed on the policy dies, the benefit is not paid. In fact, you must continue to pay standard premiums on the policy. Only when the second person dies does the death benefit pay out to named beneficiaries. For this reason, survivorship insurance is often referred to as “second to die” insurance.

When Is Survivorship Life Insurance Useful?

Survivorship life insurance is different from standard protection, since it does not benefit your spouse or family in the event that you die. However, there are certain situations in which survivorship life insurance is very useful. For example, survivorship life insurance is most often used to pay estate taxes, but it can also be used so you can make a charitable donation or so you can provide for a special needs child after your death.

Estate Taxes

Estate taxes are not accessed when one spouse inherits joint assets from another spouse. However, if you leave a substantial amount of money to your children or other beneficiaries, estate taxes are charged. Although the rules on how large an estate can be before it is subject to estate taxes change on a yearly basis, usually upwards of $1 million is exempt from estate taxes. Anything above and beyond that amount is taxed.

Survivorship insurance can be useful because when the second spouse dies, the beneficiaries receive the proceeds of the insurance policy to pay taxes. These proceeds can help ensure that heirs do not have to sell a business or expensive family home in order to pay estate taxes. If careful financial planning tools are used, survivorship insurance can also be set up to go to a trust, so your heirs can receive the insurance proceeds tax-free.

Other Uses

Survivorship life insurance can also be useful to allow you to ensure your special needs child is cared for or to protect your legacy upon your death with a large charitable donation. For example, if you have a child who requires care, you or your spouse may be able to provide that care while one of you is alive. However, upon the death of the second spouse, the survivorship life insurance proceeds can be used to provide the care that the child now needs form a third party.

These policies can also be useful if you are unable to qualify for life insurance on your own. Since two people are insured, underwriting standards tend to be looser and premiums lower. Therefore, survivorship life insurance may allow you to ensure someone who otherwise would be uninsurable or who it would cost too much to insure, provided you don’t need the proceeds from the survivorship life insurance until after both parties pass away.

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