Advantages and Disadvantages of Survivorship Life Insurance – Consider the Good and the Bad

Advantages and Disadvantages of Survivorship Life Insurance Consider the Good and the Bad

A survivorship life insurance policy, commonly known as second to die life insurance, provides insurance for two people. Most frequently, a husband and wife will decide to take out a survivorship life insurance policy together. The most common reason to do so is if the couple is quite wealthy and wants to help their heirs offset high estate taxes they will be subject to when they receive their inheritance. Traditional life insurance is paid out when the insured individual passes away. The same is true here, but keep in mind that two people fall under the policy, so they must both pass away before the funds are made available to the beneficiaries.

There are both advantages and disadvantages to survivorship life insurance. The first benefit is that it is a less expensive way to insure two people. The premium you pay is based on the life expectancy of both insured parties. Also, it is easier to buy than traditional life insurance because the bad health of one individual is not too large of a concern for an insurance company since both individuals must pass on before the money is made available. Last, the timing of payout is ideal because estates do not transfer to heirs until both parents have died. In this way, the money in the survivorship life insurance policy can go directly toward paying these taxes.

There are drawbacks as well. First, the terms and conditions cannot be changed once you sign your policy into being. Make your decision carefully because there is no changing your mind. This can be a challenge, however, because since a prominent reason to take out a survivorship life insurance policy is to cover the cost of estate taxes, it can be difficult to know what those taxes will be. This is the case because it is usually impossible to accurately predict life expectancies and know how the estate and applicable taxes might change in that time.

Also, keep in mind that if the insured individuals get a divorce, the policy becomes more complicated, though a rider option can help curb the complications. Be sure you do not confuse a joint life policy with a survivorship life insurance policy. Joint life policies allow death benefits to be paid out after the death of only one insured individual. Survivorship life insurance policies require both individuals to pass away before the money can be paid out to their heirs.

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