What is a Last-Survivor Policy?
A last-survivor policy, also known as a survivorship life insurance policy or second-to-die policy, is a type of life insurance that covers two individuals and pays out the death benefit only after both insured parties have passed away. It is often used as estate planning or wealth transfer tool, providing financial protection for beneficiaries and helping to address estate tax liabilities. Understanding last-survivor policies is essential for individuals and families seeking to protect their assets and provide for their loved ones’ future financial security.
Understanding Last-Survivor Policies
Imagine you have a boat, and you want to make sure it’s still floating even if one of the two people on board falls overboard. That’s similar to a last-survivor policy—it’s like insurance for both people, but the payout only happens when both are gone. Last-survivor policies are commonly used by couples, especially those with significant assets, to ensure their estate can cover expenses and taxes after both spouses have passed away.
Key Aspects of Last-Survivor Policies
- Coverage for Two Individuals: Last-survivor policies provide coverage for two insured individuals, typically spouses or partners. The death benefit is paid out after the death of the second insured person, ensuring that financial protection is available for the surviving spouse or beneficiaries.
- Estate Planning Tool: Last-survivor policies are often used as an estate planning tool to help cover estate tax liabilities and provide liquidity to pay estate settlement costs. By combining the lives of two insured individuals, the policy can provide a substantial death benefit to heirs or beneficiaries upon the death of the surviving spouse.
- Lower Premiums: Last-survivor policies typically have lower premiums compared to individual life insurance policies covering each insured separately. This is because the risk to the insurance company is lower since the death benefit is not paid out until both insured individuals have passed away.
Example of Last-Survivor Policy
Let’s consider a hypothetical example to illustrate how a last-survivor policy works:
John and Mary are a married couple with significant assets, including a family business and valuable real estate holdings. They are concerned about how their estate will be distributed and the potential tax implications upon their deaths. To address these concerns, they decide to purchase a last-survivor policy.
John and Mary purchase a last-survivor life insurance policy with a death benefit of $2 million. The policy specifies that the death benefit will be paid out to their children upon the death of the second spouse. They choose this option because they want to ensure that their children will be financially secure after both of them have passed away.
Over the years, John and Mary faithfully pay the premiums on their last-survivor policy. They review their estate plan periodically and update the beneficiaries as needed. Unfortunately, John passes away unexpectedly, leaving Mary as the surviving spouse.
Even though John has passed away, the last-survivor policy remains in effect, and Mary continues to pay the premiums. The death benefit will only be paid out upon Mary’s death, ensuring that their children will receive the $2 million payout to help cover estate taxes and other expenses.
Conclusion
In conclusion, a last-survivor policy is a type of life insurance that covers two individuals and pays out the death benefit only after both insured parties have passed away. It is commonly used as an estate planning tool to provide financial protection for surviving spouses or beneficiaries and address estate tax liabilities. By understanding the concept of last-survivor policies and their key aspects, individuals and families can make informed decisions to protect their assets and provide for their loved ones’ future financial security.