Survivorship life insurance is a type of joint life insurance policy designed to cover two people (usually spouses) instead of just one. It only pays a benefit after both policyholders pass away. Because this type of insurance only provides one benefit payout, it isn't always right for people’s needs – but if one or both partners in a marriage are non-resident foreign nationals, this type of policy can play a critical role in their estate planning, because the death benefit is generally exempt from US federal estate taxes.1 In this article, we'll explain:
How a survivorship life insurance policy works
How life insurance can help protect the family assets of foreign nationals
Finding the right life insurance solution for your situation
How a survivorship policy works
When two people are covered under the same life insurance policy, the issue of when the policy pays a benefit is critical. That’s why there are two types of joint life insurance policies:
In a "first-to-die" policy, the life insurance company pays a benefit after the first insured person dies.
Survivorship policies are "second-to-die" policies, where the benefit is only paid out after the second (surviving) person passes away.
A survivorship policy can't be used to provide income replacement for a surviving spouse in retirement, because the payout only occurs after the second partner dies. Instead, the payout must go to the couple's beneficiaries, which is one reason why these types of policies are often used for estate planning.
There can also be cost advantages to getting a survivorship policy for estate planning. For a given death benefit amount, generally speaking, it costs less to get a single survivorship policy than two individual policies. And since joint life expectancy is longer than individual life expectancy – one insured typically dies sometime after the other – second-to-die (survivorship) policies are typically more affordable than first-to-die policies. But as with any life insurance, the actual policy cost can vary widely based on a number of factors, including age, health, lifestyle, type of insurance, and the insurance company.
In any case, second-to-die survivorship coverage is almost always purchased with permanent universal or whole life insurance, as opposed to term life insurance. The reason is simple: most of the couples buying a survivorship policy don't want temporary protection. If the policy term ends before both partners die, there's no death benefit.
How life insurance can help foreign nationals mitigate the impact of US estate taxes
Simply put, non-resident foreign nationals are more likely to owe significant estate taxes due to provisions in the tax code that favor US residents:
Generally speaking, a US citizen or foreign national domiciled in the United States tax gets a $12,920,000 million estate tax exemption; after that amount, their estate is responsible for up to a 40% tax.
Non-domiciled foreign nationals get just a $60,000 exemption -- and are responsible for up to 40% of estate taxes above that amount.
This US estate tax disparity applies to the transfer of tangible assets (such as real estate) and intangible assets (such as stocks, bonds, and savings accounts) located in the United States. The significance of this disparity is not always well understood by nonresidents; however, with proper planning, it may be addressed.
Overcoming the estate tax disparity
Nonresident life insurance can help overcome the estate tax disparity problem because death benefit payments – in both individual and joint survivorship policies – are generally exempt from federal estate taxes. Another advantage: money is transferred to beneficiaries without going through the probate process, which can be time-consuming for a large estate. These features make life insurance an attractive wealth-transfer vehicle for many foreign nationals with US-based assets. A permanent universal or whole life insurance policy that builds cash value can provide a number of other advantages when it comes to estate planning and preserving family wealth:2
Covering potential estate taxes with life insurance
The US government imposes estate taxes on US-situated assets for nonresidents. Still, US-denominated life insurance can provide the liquidity needed to cover potential estate taxes without having to sell all or a portion of these holdings, preserving the estate's value for heirs.
Portfolio diversification and risk mitigation
Permanent, whole life insurance builds cash value at a guaranteed life insurance rate and is among the lowest-risk financial products available.3 A policy can build US-denominated cash value that can be accessed while the policyholder is still alive, acting as an effective hedge against economic downturns in one's home country, fluctuating exchange rates, and other forms of geopolitical risk.4
Asset protection
Life insurance policies are generally protected from creditors and bankruptcy.5 This can provide an additional layer of protection for foreign nationals' assets.
How foreign nationals can find the coverage they need
As a foreign national, eligibility for life insurance largely depends on your legal residency status in the United States, which can be broken down into three main categories: green card holders/permanent residents; non-permanent residents with visas; and non-residents with US ties:
Permanent residents
Non-citizen “green card” holders are generally eligible for the same individual and joint life insurance options available to regular US citizens with a similar risk profile (age, gender, health status, and so on). Keep in mind that if you fall into this category, you may also qualify for the higher $12,920,000 exemption. But while you may have less need for life insurance for estate tax purposes, it’s still an important source of financial protection.
Non-permanent residents with visas
If you have an H1B or other temporary work visa, you may still be able to get coverage, but face more challenges compared to a permanent resident. However, it’s also important to note that temporary residents may sometimes be considered “US domiciled” for estate tax purposes, meaning they qualify for the higher, $12,920,000 exemption. However, domiciliary rules for estate tax purposes can be complex. For example, individuals present in the US on nonresident visas (such as G-4 visas) may be considered US-domiciled for estate and gift tax purposes, even though they are considered nonresidents for US income tax purposes.6 A qualified tax attorney is recommended to help navigate the complex and often seemingly contradictory domiciliary rules, and to help you determine if life insurance is appropriate for your estate planning needs.
Non-resident foreign nationals with US ties
Non-US residents typically find it hard to obtain US life insurance, but some high-net-worth foreign nationals with significant business, financial, and family ties in the U.S. may qualify for permanent whole or universal life insurance. These policies are typically quite specialized, and designed to help internationals with personal and business interests in different countries manage their complex affairs. Availability may be limited by your country of residence, and if coverage is offered, the underwriting process can be quite involved.
Despite such limitations, individual or survivorship life insurance policies can be an invaluable tool for internationals looking to the US as protection for family capital and assets. In addition to diversifying their financial portfolio, such polices can help solve the problem of transferring wealth to the next generation: The non-domiciliary $60,000 estate tax exemption doesn’t apply to death benefit payments, because these benefits are exempt from federal estate taxes.
The Global Citizens Program
Guardian provides specialized life insurance solutions and services designed to meet the unique demands of high-net-worth international clients. Our Global Citizens Program allows qualifying clients to tap into a dedicated team that specializes in the more complex financial protection needs of clients with multinational interests – and provides white-glove service with the backing of one of the world's largest mutual life insurance companies. Clients must be non-resident, non-US citizens who demonstrate financial connections, holdings and/or family ties in the US. A dedicated case concierge team is assigned to help each applicant, and submissions are evaluated by specialized underwriters. Other amenities include a complimentary US trust review, translation services, law firm referrals, and more. To learn more, contact a Guardian financial professional.
Have a specialist help match the right life insurance solution with your estate planning goals.
If you’re a foreign national with US residency, a Guardian financial professional will work closely with you on a one-to-one basis, and then tailor an estate planning solution that precisely fits your needs. Or, if you’re a nonresident with ties to the US, ask about the Global Citizens Program.
1 Guardian, its subsidiaries, agents and employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation. The information provided is based on our general understanding of the subject matter discussed and is for informational purposes only.
2 Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.
3 All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.
4 Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.
5 State creditor protection for life insurance policies varies by state. Contact your state’s insurance department or consult your legal advisor regarding your individual situation.