A More Affordable Life Insurance Solution

Many people allow their life insurance policies to expire once their children are grown. This may not be a good idea, especially if you have a mortgage or other substantial expenses and your spouse would need continued financial support. But a new policy can be quite expensive when you are older. Survivorship life insurance may be a more cost-effective solution.

Coverage for Two

Survivorship life insures the lives of two people, typically a married couple, and pays a death benefit after the death of the last-surviving covered person. For this reason, it is sometimes called second-to-die insurance. Because only one death benefit is paid and premiums are based on the life expectancies of both insured individuals, the cost is usually less than premiums for a policy covering either life alone. And it might be possible to obtain coverage for a spouse who has been rejected for an individual policy. Survivorship policies are also used to insure business partners, and options may be available to insure more than two people.

Survivorship policies are typically permanent life insurance, which offers lifetime coverage and stays in force as long as the premiums are paid. The death benefit of a survivorship policy could be used to leave a legacy for your heirs, pay taxes, settle an estate, and pay other end-of-life expenses.

Creating Cash Value

A portion of the premium goes into a cash-value account, which accumulates on a tax-deferred basis throughout the life of the policy. Any cash value accumulated at the time the first spouse dies might be used to help support the surviving spouse. The cash value could also be tapped through loans or withdrawals while both spouses are alive and used for emergency expenses or to supplement retirement income.

Withdrawals of the accumulated cash value, up to the amount of the premiums paid, are not subject to income tax. Loans are also free of income tax as long as they are repaid. Loans and withdrawals will reduce the policy’s cash value and death benefit and could increase the chance that the policy will lapse.

Five Good Reasons
Percentage of consumers who gave these reasons for owning life insurance (multiple responses allowed)
Percentage of consumers' reasons for owning life insurance: 84% - pay final expenses; 66% - transfer wealth; 62% - replace lost income; 57% - supplement retirement income, 50% - help pay off mortgage.
Source: 2020 Insurance Barometer Study, LIMRA and Life Happens

As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. If a policy is surrendered prematurely, there may be surrender charges and income tax implications. The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Any guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company.

Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable.