How are Survivorship Life Insurance Policies Helpful in Estate Planning

Table of Contents:

• What is Survivorship Life Insurance
• Estate Planning
• Why Do You Need An Estate Plan?
• When Should You Start Your Estate Plan?
• Survivorship Insurance In Your Plan
• Estate Tax Coverage
• Avoid Breaking Up Assets
• Additional Uses
• Other Considerations

Want to know how to clear out your house quickly when guests continue to linger near the end of a party?

Start talking to the entire group about life insurance, estate planning, and how you are excited to have combined the two to maximize what you’ll eventually pass on to beneficiaries.

It’s sure to bet your place will be empty within minutes.

Let’s face it, life insurance and estate planning aren’t the sexiest of topics. But saving taxes and passing on wealth to our loved ones or charities that are near and dear to our hearts can actually grab our intention.

Moreover, they can motivate us to work with a financial advisor to create a robust estate plan, even if we’ve never considered

Today we are going to address using a life insurance policy in an estate. One that covers a couple (versus using two life insurance policies), helps pass on more wealth from their estate to beneficiaries and provides other important benefits.

What is Survivorship Life Insurance

First things first, let’s define survivorship life insurance and how it can be helpful in your estate planning.

Most are familiar with regular life insurance, which covers a single person. When that person passes, the insurer pays the death benefit to their beneficiaries.

Survivorship life insurance is a type of permanent life insurance. It is often sold as whole or universal life insurance which can accumulate a cash value, enabling the policyholders to potentially take tax-free withdrawals from, or borrow against, their policy.

The policy actually covers two people, remaining in effect as long as the premiums are paid. The policy covers the duration of both policyholders’ lifetimes.  When the first person dies, the surviving policyholder automatically retains ownership of the insurance with no tax issues.

Upon the death of the surviving policyholder, the insurer pays the death benefit to the designated beneficiaries, which can range from the adult children of the policyholders to qualified charitable entities or foundations, and more.

Estate Planning

Just as with survivorship life insurance, let’s start with an explanation of estate planning given many people don’t really understand what it is and what it can help them address and accomplish.

Estate planning is a form of financial planning that focuses on addressing goals, desires, and concerns you might have regarding your assets.

A good plan is intended to protect your assets (against lawsuits and creditors), specify the people or organizations that will receive those assets after you die, reduce the tax burden of the estate, determine who will control those assets while you are alive but incapacitated (if that becomes an issue), and/or after you die (estate executor), and more.

Why Do You Need An Estate Plan?

Many people actually think they don’t have much of value, and as such, think an estate plan is unnecessary for their circumstances.

Let’s put that to rest. If you are reading this, you probably do have assets…and an estate. No matter how much you do or don’t have in terms of assets, ranging from a vehicle and a home to retirement accounts, savings, collectibles, lifetime season tickets, real estate, and much more, you do have an estate.

Given you worked hard to accumulate what you have, and probably have a family or charity or organization you’d like your assets to go to upon your passing, then an estate plan is a necessity.

And to ensure your plans are followed in terms of seeing those assets pass to whom you want them to in the quickest, most efficient way possible, again, you must have an estate plan.

Additionally, when properly configured, they can help ensure the tax liabilities due on an estate and your beneficiaries can be minimized to the fullest extent possible.

When Should You Start an Estate Plan?

It’s a common misperception that estate planning is for people that are older – those who are approaching or in retirement.

The fact is that many advisors will suggest that when an individual becomes a legal adult at age 18 they should start a plan and prepare to update every three to five years thereafter as their life changes.

Why?

Again, no matter how many assets you own or their value, you want to protect them from creditors or in the event you get dragged into a lawsuit. You also want to be able to designate where they go when you pass versus having your estate end up in probate with a judge deciding.

If you are like the vast majority of people who didn’t create a plan at age 18, then the answer is you should start now to protect yourself, your beneficiaries and your assets.

Survivorship Insurance In Your Plan

When it comes to utilizing life insurance within an estate plan, you first have to determine if a survivorship life insurance policy makes the most sense.

This is a pretty straightforward decision in most instances. Generally speaking, if there are two policyholders, such as a couple, and neither spouse will likely need the death benefit to live on when the first person passes, then it’s likely you will want to utilize a survivorship policy.

Doing so ensures the death benefit passes tax-free to the surviving spouse. The death benefit will then pass on to the beneficiaries upon the death of the surviving spouse.

This is important because current tax law enables many married couples to defer the payment of federal estate tax until the second spouse dies, protecting the surviving spouse from having to sell their assets to pay the estate taxes.

Instead, the surviving spouse is sheltered from the tax burden, which is shifted to the beneficiaries who will receive the assets from the estate.

Estate Tax Coverage

From the standpoint of protecting the estate against federal estate taxes, survivorship insurance can help to pay those taxes in part, or even in full, utilizing the death benefit of the policy.

Once the surviving policyholder passes, taxes become due on the estate, taken before distribution to the beneficiaries.

Working with a qualified financial advisor in advance who specializes in estate planning, they will be able to determine what the estate value will likely be, as well as the associated estate taxes that will be due.

Having done so, the advisor will be able to guide you so you know how large a survivorship policy should be purchased to ensure the death benefit covers the taxes that will be due, to the fullest extent possible.

By utilizing the life insurance policy death benefit to pay the taxes, you effectively preserve and pass on more wealth to the beneficiaries, who are able to avoid having to sell off assets within the estate to pay the taxes.

This can be especially beneficial for the estates of wealthy people with assets that total more than the lifetime exemption for estate and gift taxes, which according to the IRS currently stands at $12.9 million for an individual and over $25 million for a couple. Keep in mind that starting in 2026, the exclusion reverts back to $7 million for an individual.

Avoid Breaking Up Assets

When seeking to pass on wealth to more than one beneficiary, it often becomes necessary to sell the assets in an estate. Gift and estate tax can often be avoided if the aforementioned lifetime exemptions are not surpassed, but assets must still be either divided or sold, with the cash passed on to the beneficiaries according to the wishes of the couple, as set forward in their plan.

One example of this scenario is when there is a family business involved.

Rather than having to sell the business to be able to pass on wealth equally to the beneficiaries, a survivorship life policy could be used to distribute equal value to one of more beneficiaries, while simultaneously passing on the business to one of the remaining family members.

Everyone receives equal value, but the business is able to remain intact as an ongoing entity.

In this manner, all beneficiaries receive the same value from the estate, with most receiving cash and one receiving the business.

This same approach can be used in a scenario where the couple owns a business with other owners and wants to ensure business continuity after the passing of both. A policy death benefit can pay out to the remaining owner(s), ensuring they have the necessary funding to continue to operate the entity.

Keep in mind that whatever the circumstance in terms of how the policy is utilized, generally speaking, the proceeds passed on to the beneficiaries by the insurer will be tax-free.

Additional Uses

Survivorship life insurance can also be used to address other common situations. A couple to consider are the following:

Special Needs Beneficiaries – if you have children, advanced-age parents, or other people (not your spouse) who have long-term special needs that must be funded, the death benefit of a survivorship policy can be a useful tool ensuring they get the help and assistance they need after the passing of you and your spouse.

Charitable Giving – in establishing a policy and naming an eligible charity or organization as beneficiary, you can ensure they receive the funding you wish to pass on to them, as detailed in your estate plan. Importantly, this can often be done tax-free, maximizing the amount the beneficiary receives.

Other Considerations

If you have debts and expenses you wish to have addressed and not passed on as part of your estate, you can name your estate as the beneficiary of a survivorship policy. Those debts and expenses are then covered by the death benefit upon the passing of the surviving spouse. Keep in mind there can be downsides to this strategy, so you should check with a qualified financial planner and/or tax advisor before doing so.

Survivorship insurance can often be cheaper than purchasing two life insurance policies, and it can be easier to qualify for, especially if one person has health issues and may not be able to purchase individual coverage.

When it comes to estate planning, life insurance can be a unique tool that offers many benefits, including tax-free loans and withdrawals against the cash value that is built up, potential tax advantages, and flexibility.

For a couple creating an estate plan, survivorship life insurance can be the way to go, allowing them to use one policy versus two (often cheaper), and ensuring the policy passes automatically upon the passing of the first person to the surviving policyholder.

Such a policy can be used to pay for estate taxes, if necessary, lessen or eliminate the burden on beneficiaries, help fund things such as college for designated beneficiaries (for example: grandkids for college), avoid having to sell assets (like a family business in order to pay for taxes), and more.

The key to leveraging the use of a survivorship policy within an estate plan is to work with a financial advisor or retirement planner to determine what will work best with your situation, given your unique desires and goals.

We’d be happy to review your existing estate plan or build a new one specific to your situation. Our overall approach is to incorporate a holistic model that considers all your assets, tools, and accounts, with the goal of providing a comprehensive plan that will help reduce tax liability, increase the amount of wealth you pass to beneficiaries, and determine who gets what upon your passing.

If you’re ready to take the next step and talk to a team of financial advisors and retirement planners who put your interests first, Schedule a call today!