Survivorship life insurance, also know as joint survivor life insurance or second-to-die life insurance, insures two lives and pays the death benefit upon the death of the second insured person. This type of policy is typically use for estate planning purposes but is also often used for parents of children with special needs. The two most common types of survivorship life insurance are Universal Life and Whole Life insurance. Term life insurance, being only temporary coverage, doesn’t make sense for this type of coverage (as evidenced by the fact that, at the date of this writing, only one company offers such a product).
Survivorship Life Insurance for Estate Planning
If a married couple has an estate that exceeds the exemption equivalent of the Estate Tax Unified Credit allowed by the federal government, an estate tax will be due on the amount exceeding the exemption amount. Rather than leaving their heirs to liquidate all or part of the estate in order to pay this “death tax,” families who have accumulated significant estates purchase survivorship insurance solely for the purpose of paying this tax. As the cost of the life insurance is usually significantly less than the tax liability would be, proper planning allows you to basically pay the tax with “discounted dollars.”
As the policy pays upon the death of the second insured person, the premiums for these joint policies are usually much less than if two separate policies were purchased. Also, because this type of planning is usually done by couples in their 60′s and 70′s, there’s always the possibility that one of two insured parties might be in a lower underwriting class or even be uninsurable. Because two people are being insured, as long as one of the two is insurable and not in a substandard rate class, most insurance companies would issue a policy covering both parties.
Parents of Special Needs Children
These policies are also often used for parents of special needs children to insure that their needs will be cared for if both parents should die. While we are knowledgeable in life insurance matters and can help structure the right policy for this purpose, there are a lot of professionals working in the area of special needs children who can help guide you through this very specialized planning.
For a good place to start, we recommend the Special Needs Alliance (www.specialneedsalliance.com), an organization of about 100 attorneys specializing in planning for families with special needs children. These attorneys typically provide the necessary services including:
- Drafting a letter of intent. This letter would provide instructions to your trustee and guardian as to how to care for your child. It would include a description of your child’s medical history, current needs and other important information needed by the caregiver in the event of the deaths of both parents.
- Drafting a will to establish when and how your assets will be distributed. Without a will, your child would most probably have to wait for the end of a long probate cycle to affect the transfer of your assets.
- Setting up a Special Needs Trust to manage the assets of the special needs child. By distributing your assets to a trust, rather than directly to the child, you are also protecting your child’s eligibility for government benefits (assets in excess of $2,000 distributed to the child could make your child ineligible for those benefits).
- Recommending a funding mechanism for the trust (Typically life insurance).
As I mentioned earlier, we can assist you to help you set up the correct insurance policy to fund the trust in the event of death. Joint Survivor or Second-to-Die life insurance is the insurance product generally used to fund a Special Needs Trust for a two-parent family. The policy will pay the beneficiary (the trust, in this case) upon the death of the second parent. The trust will have instructions as to how and when the funds from the insurance policy should be distributed. Also, life insurance policies are often acquired on each of the parents so that the financial burden on the remaining spouse would be eased in the event of one parent’s death.
The information provided in this article is not intended as legal advice. In these matters, you should definitely seek out an attorney and insurance broker who specializes in this type of planning. If you would like to get quotes for survivorship life insurance. you can complete the quote request form or please feel free to call or email us with your request.