Survivorship Life Insurance Benefits for Estate Planning | New Mexico Financial & Estate Planning Attorneys

New Mexico families can use a survivorship life insurance policy if they are interested in leaving behind a legacy for their loved ones or another important cause, like a charity. These special arrangements provide a joint death benefit for two policyholders, but only after both covered individuals die. Typically, the policyholders are a married couple, but they can also be business partners, siblings, or any two adults. So, how are survivorship life insurance policies helpful in estate planning? For many different reasons, which we will cover in detail below.

Reach out to a New Mexico estate planning lawyer for more information on how survivorship life insurance policies can be helpful for your specific situation. Your estate planning attorney can provide personalized guidance, including whether a survivorship life insurance policy is the best choice compared to alternatives. They can advise you on whether you might want to list a trust as the beneficiary of the policy, providing multiple advantages on top of the benefit your survivors are already going to receive.

Learn more when you talk to an experienced estate planning attorney in New Mexico about your specific situation. Schedule a confidential, no-obligation consultation and estate plan review with New Mexico Financial & Estate Planning Attorneys when you call us at (505) 503-1637 or contact us online today.

What Is a Survivorship Life Insurance Policy? How Does One Typically Work in New Mexico?

Here are the basics of a survivorship life insurance policy and how they work:

A survivorship life insurance policy is a special type of policy that covers two individuals
In most cases, it is a permanent policy, not a term policy
The death benefit is paid to a chosen beneficiary or group of beneficiaries
When multiple beneficiaries are listed, the benefit can be split evenly between them or allocated according to a set percentage for each beneficiary
The death benefit is not paid until both covered parties die, leading the policies to sometimes be referred to as a “second-to-die” life insurance policy

Some other important details are listed below.

Survivorship Life Insurance Policies Are Often Cheaper and Easier to Acquire

These policies usually carry cheaper premiums compared to obtaining two individual life insurance policies. They can also be easier to acquire for couples where one individual has poorer health or, for whatever reason, may have a tougher time qualifying for affordable coverage.

Premiums Are Paid for Life, Accumulating a Cash Value That Can Be Borrowed Against

Most survivorship life insurance policies are permanent, meaning that the coverage is available no matter how long the policyholders live, so long as they continue to make timely premium payments.

Some of the value of the payments accrues in the policy, similar to a savings account. The policyholders can borrow against this cash value to take out a loan, albeit with interest. The policyholder also may have the option to surrender the policy to the insurance provider, effectively serving as a “buyout” that can provide the policyholder(s) with a lump sum of the policy’s cash value, minus fees.

However, both borrowing against the policy and cashing it out can be less desirable financial choices compared to continuing the policy with its full cash value intact. Any borrowing or withdrawing from the cash value will diminish the value of the benefits ultimately offered. There are also fees and other expenses taken out of premiums each time they are paid, so the cash value is not 1:1 to the true cost of the policy.

Nevertheless, survivorship life insurance policies, like other permanent life insurance, can offer convenient backup capital, especially in emergencies where a substantial infusion of cash is needed.

How Can Survivorship Life Insurance Policies Be Useful for Estate Planning in New Mexico?

Like other permanent life insurance policies, the biggest advantage of a survivorship life insurance policy for estate planning is that the benefits are given to the beneficiary tax-free.

Usually, the goal of a life insurance policy is to provide an immediate and non-taxable infusion of cash to support a surviving spouse, surviving minor dependents, or other dependents. These proceeds can pay for the costs of a funeral and burial. They can also cover other major expenses encountered because of the life changes that come from losing a loved one who helped support you financially. The surviving spouse may need to move to a new home, for example, pay off medical debt incurred from treating the deceased spouse’s terminal condition, or temporarily cover the difference in household income.

A survivorship life insurance policy can fulfill many of the same goals, but with a significant catch: there’s typically a major delay before benefits can be claimed after the death of the first spouse. As a result, the surviving policyholder must be able to cover major expenses like funeral and burial without having to tap into the policy, unless they want to borrow against its cash value, which affects available benefits.

So, instead of benefiting a spouse or other loved one immediately, a survivorship life insurance policy acts as more of an estate planning safety net for when both policyholders die.

This arrangement can enable advanced estate planning strategies for the following situations:

Guaranteed funds for permanent dependent care. The policyholders have a permanent dependent, such as a disabled adult child or relative, who needs their financial support to maintain their care and quality of life
Debt/estate tax liquidity. There are concerns about large estate costs after the death of the policyholders, such as if there are substantial debts to resolve or if the insured are at risk of exceeding their estate tax exemption amount.
Asset equalization. The policyholders want to leave large value assets, such as a business or luxury property, to certain heirs without risking the need for the property to be liquidated for all heirs to receive a reasonably fair share of the estate
Funding a buyout. Similar to the situation above, the estate may require a buyout of a joint business partner or property owner, which means that heirs need an infusion of cash to avoid selling off their share of interest
Legacy planning. The policyholders want to guarantee a sizeable cash transfer to loved ones, a charitable cause, or some other venture they supported in life.
Trust planning. The beneficiary listed can be the estate itself or a trust, including an irrevocable life insurance trust (ILIT) or special needs trust

Talk to a New Mexico estate planning attorney for more guidance and information relevant to your specific situation.

Types of Survivorship Life Insurance Policies (And Alternatives)

There are two major options of survivorship life insurance policies: whole vs. universal.

Whole survivorship life insurance policies have a guaranteed benefit and guaranteed premium amounts throughout the life of the policyholders. They can cost more upfront compared to a universal plan, but avoid the major increase in premiums that policyholders may experience as they age.
Universal survivorship life insurance policies can have the size of the benefit and premiums adjust over time in response to market conditions, the insurance carrier’s financial performance, and the company’s own policy rules (which may change over time). The benefit of this arrangement is that the premiums usually start much cheaper if the policy is acquired while the covered individuals are relatively young. The policy itself can be changed flexibly to meet the desired coverage and premium amounts.

Some carriers may also offer survivorship term life insurance, meaning that the policy can expire after a set time period without ever paying benefits to the covered parties. While this arrangement results in much lower premiums, the tradeoff is that the value of premiums is forever lost once the policy expires. There is no option to retain the cash value of the policy.

It may be possible for a carrier to convert a term policy to a permanent one, in some cases, while rolling over a portion of the value of premiums already paid towards the permanent policy’s cash value. This arrangement often results in significant expenses compared to purchasing a permanent policy from the onset. Talk to your prospective carrier to learn more about this option, and weigh the pros and cons accordingly.

Joint Life Insurance Policies vs. Survivorship Life Insurance Policies

Joint life insurance is offered by some carriers under a similar arrangement, paying one death benefit for two covered individuals. However, with a joint policy, the death benefit is paid immediately after the death of the first covered person. This quality is why these policies are sometimes called a “first-to-die” life insurance policy.

How Are Life Insurance Proceeds Taxed?

Per IRS rules, the death benefit of life insurance policies is tax-free. However, any interest or growth in asset value stemming from the use of the policy benefit or its cash value counts as income.

When beneficiaries receive the policy’s benefit, they can deduct the cost of the required premiums originally paid by the policyholders as well as any fees, additional premiums, and certain other expenses. As a result of this calculation, in some situations, there may be some excess value from the policy that must be reported as gross income for the tax year it was received.

Using a Survivorship Life Insurance Policy to Fund an Irrevocable Life Insurance Trust (ILIT) or Special Needs Trust

A survivorship life insurance policy can list a trust as its beneficiary. This estate planning strategy is typically used to fund one of two main types of trusts: an irrevocable life insurance trust (ILIT) or a special needs trust.

Using a Survivorship Life Insurance Policy With an ILIT

An ILIT is a special type of trust that typically uses the following arrangement:

Someone (called the grantor or settlor) forms an irrevocable trust, funding it with some of their assets and naming someone other than themself as trustee
The trustee uses the money in the trust to take out a life insurance policy on the grantor
The trustee lists the trust itself as the beneficiary of the life insurance policy
The trust lists other parties as beneficiaries to the trust; these parties may receive a lump sum when the covered person dies, or they may instead receive regular distributions from the trust, depending on the rules set by the grantor
Policy premiums can be paid for using the grantor’s annual gift tax exclusion through a Crummey letter arrangement, which gives someone the right to withdraw the contribution within a short window; if the party declines the gift, the gift can go to the trust without deducting from the grantor’s lifetime gift tax exemption amount

An ILIT offers many of the same advantages as a life insurance policy by itself, with one major difference: because the trust is the beneficiary of the policy, the proceeds from the death benefit can stay in the trust for months or years after the grantor dies. The use of a Crummey letter can also mean that the premiums themselves don’t deduct from the grantor’s lifetime estate tax exemption. However, this is only a concern for ultra-high-net-worth families.

By keeping the death benefit’s proceeds in the trust, they can be used to fund investments, generating income that the trust’s beneficiaries can draw from for years to come. ILITs can also be used to provide capital infusions for major investments, share buyouts, or covering estate-related expenses during probate.

Using a Survivorship Life Insurance Policy With a Special Needs Trust

A special needs trust can receive life insurance death benefits along with other contributions without counting as income for a disabled beneficiary.

If the disabled beneficiary is relying on a program like Medicaid or Supplemental Security Income (SSI), then gifting them a large inheritance would normally cause them to be disqualified from the program’s income requirements. By contributing funds to a trust instead, the trust can pay for expenses not covered by the public program.

Examples of expenses that a special needs trust can cover include:

Transportation
Out-of-pocket medical costs
Expenses for non-medical care
Clothing
Entertainment, recreation, and enrichment, such as electronics, streaming subscriptions, etc.
Education expenses, including books and school supplies
Insurance
Furniture
Medical equipment not covered by the public program

Talk to a New Mexico trust attorney for more guidance on setting up a special needs trust, especially if you intend to use a complicated method like a survivorship life insurance policy to fund it.

Talk to an Experienced Estate Planning Law Firm Today

Survivorship life insurance policies may be most useful for families at risk of triggering estate taxes. It can also be useful for couples who want the security and legacy-building potential a policy can bring, but who may be unable to affordably purchase individual policies because of personal risk factors.

In many cases, the costs used to pay premiums could be more financially beneficial over the long term when placed inside an investment account. However, if a family is at risk of exceeding the estate tax exemption, then the tax-free death benefit of a survivorship life insurance policy could be well worth it.

Ultimately, the decision for when and how to use this strategy comes down to your goals and the unique life situation you find yourself in. New Mexico Financial & Estate Planning Attorneys is ready to provide tailored advice after listening closely to the details of your finances, your family, your goals, and any other factors relevant to your estate.

Get advice and strategic options for the future when you call (505) 503-1637 or contact us online to schedule an appointment with an experienced New Mexico estate planning lawyer.

How Are Survivorship Life Insurance Policies Helpful in Estate Planning?