Most people are very familiar with individual life insurance policies that will pay a certain amount to beneficiaries upon the death of the policy holder. A survivorship, or second-to-die, life insurance policy insures two individuals, usually spouses, and only pays out when both have passed away.
There are several reasons a family may be interested in a survivorship policy as opposed to, or in addition to, an individual life policy. If a family has a substantial estate that may be subject to an estate tax, the proceeds of this policy may be used to offset some of what may be owed upon the death of the second policy holder. Also, these policies are generally easier to qualify for and less costly. The health and medical histories of both applicants are considered, making it easier for an individual in poor health to qualify for coverage. And since the benefit is only paid after both parties have died, premiums are generally lower than individual policies. Some families also use second-to-die policies as a way to add additional wealth to their overall estate. For example, it’s not uncommon for parents to use a policy to fund a special needs trust.
Of course, there are also disadvantages to survivorship policies. For instance, when the first spouse dies, the second must continue to pay the premium, which may be difficult if the remaining spouse lacks the funds to do so. Also, if a couple has a large disparity in age, the younger spouse may end up paying more than they would have for a solo policy, since the premium is calculated using the average age of the insureds.
Second-to-die policies are just one of the tools that can be used in forming a comprehensive estate plan. It’s always wise to consult an experienced estate planning attorney before making decisions regarding insurance products.