Q.

I’d like to read your opinion regarding “second to die” (survivorship) life insurance.

A.

This question was a little tricky to answer, since no context was given to the question.  Survivorship Life Insurance (SLI) is also often called “Second to Die” or “Joint and Survivor” Life Insurance.  I’ve never heard of SLI applied to term life insurance, but I suppose I could conjure up some kind of weird scenario where a couple might not need insurance unless both of them actually died.  Consider a two-physician couple with small children that could get by on just one of their incomes, but that wanted to provide for their children in the event that they both went over a cliff together while the kids were at the babysitter’s.  The main benefit in that kind of a situation would be that the premiums ought to be much smaller than buying a policy half the size on each of the two earners.

More commonly, SLI is used as an estate planning tool.  As near as I can tell, it is almost always used on a whole life or universal life policy.  That means to even consider this type of life insurance, you have to be willing to mix investing and insurance, which I generally recommend against.

If you live to your life expectancy, using a permanent (whole life/variable life/universal life) life insurance policy to provide funds at your death will generally result in less money being available than would have been had you invested it outside the policy.  The reason for buying the insurance is so that a PREDICTABLE amount of money is available at the time of death, NO MATTER WHEN the death may come.  Obviously if you die early, you get a lot better “return on your investment” than if you die later in life.  So if it is more important to you to ensure that $1 Million (or whatever amount) is available at the time of your death (whenever that may come) than to leave as much as possible to your heirs (as well as maximize flexibility if it turns out you need the money yourself), then the guarantees associated with a permanent policy may be worth the additional costs.

What are some reasons why a reasonable, informed person might choose to buy a permanent policy?  I can think of at least 3 instances when it could make sense.

1) Disabled Child-  You may have a disabled adult child you are currently providing for.  You anticipate providing for this child throughout your retirement and would like to provide even after your death.  You figure you’ll need about $2 Million to provide after your death, whether you die tomorrow or at age 90.  Since you have a permanent life insurance need, you should consider buying a permanent policy.

2) Illiquid Assets in a Large Estate-  Another scenario involves providing a way to pay estate taxes on an illiquid asset.  Under current law, each spouse can pass on up to $5 Million to the heirs without paying estate taxes.  Imagine a couple that owns a $15 Million farm, but not much cash.  They want their only son to get the farm when they die, but know he would have to sell the farm at fire-sale prices in order to pay the estate taxes due on the gift.  By purchasing an insurance policy that would cover the cost of the taxes due at their death, they keep the farm in the family.

3) Annuity Options-  Occasionally it might make sense for a couple to buy a permanent life insurance policy in order to insure against longevity of a non-annuitant.  Consider a single-earner couple where the man retires and his work gives him a retirement annuity of some type.  He is often faced with the choice of how to take it.  He can take a larger payment that disappears at his death, a smaller payment that continues until they both die, or some combination thereof (a common one is that the remaining spouse gets 50-75% of what they were receiving before his death.)  If he would like his wife to be able to have the same amount of money after his death as before, he has three options.  He can just take the joint annuity and they can live on smaller payments throughout retirement.  He can take the single annuity and invest part of it as he goes along so hopefully his wife will have a sufficient nest egg to provide income when he does die.  Finally, he can take the single annuity and use some of the additional payment to buy a permanent life insurance policy that would provide that nest egg for his wife upon his death.

So where does SLI come in?  Many couples that actually have a need (or desire) for a permanent life insurance policy probably ought to get an SLI policy.  In the above three scenarios, the parents of the disabled child and the successful farmers would probably want an SLI policy.  The annuitant obviously wouldn’t.  If you don’t need the money until the death of the second person, you might as well get the lower premiums available with SLI.

SLI policies are also often easier to qualify for, since the insurance company might not care so much if one of the spouses isn’t in the best of health, especially if the other one is very healthy (or younger.)

One thing to consider before buying an SLI policy is the effects of divorce.  Some policies allow you to split the policy in certain circumstances.  It may cost you a little more to get that rider though.

But before considering whether survivorship insurance is right for you, you first need to decide if you need or want a permanent life insurance policy.  The truth is you probably don’t need it or want it.  Most doctors and similar professionals won’t ever have a permanent life insurance need.