How Survivorship Life Insurance Policies Can Be Helpful in Estate Planning

Introduction

Survivorship life insurance, often referred to as second-to-die insurance, is a specialized form of life insurance that covers two individuals—typically spouses—and pays out a death benefit only after both have passed away. While this policy type may not be as widely discussed as traditional single-life insurance, it plays a pivotal role in strategic estate planning, especially for high-net-worth couples.

This article explores how survivorship life insurance works, its unique benefits for estate planning, how it compares to single-insured policies, and when it’s most effectively utilized. We’ll also examine optimal funding structures and common pitfalls to avoid. Whether you’re a financial advisor helping clients navigate complex estate challenges or a client seeking to secure your family’s financial future, this guide will clarify how survivorship life insurance can become a powerful planning tool.

How survivorship life insurance works

Survivorship life insurance insures two lives under a single policy and pays out the death benefit only after both individuals have died. It is commonly used in estate planning for married couples because the estate tax liability often does not arise until after the second spouse passes, making the timing of the benefit ideal for covering estate taxes and other obligations.

These policies are generally offered as permanent insurance, such as whole or universal life, ensuring lifetime coverage rather than term-limited protection. Premium structures can vary, but level premiums or flexible universal life premiums are typical.

Unlike traditional single-life insurance, which provides a payout upon the death of the insured individual, survivorship policies delay the payout until both insured parties pass. This design allows for lower premiums compared to purchasing two individual permanent life policies and facilitates long-term estate planning strategies that focus on wealth transfer and tax efficiency.

Key estate planning benefits of survivorship life insurance

Survivorship life insurance offers a range of strategic advantages for estate planning, particularly for wealthy individuals and families seeking to protect assets, minimize tax burdens, and fulfill legacy intentions.

Providing liquidity for estate taxes and expenses

One of the most pressing challenges in estate planning is ensuring that sufficient liquid assets are available to pay estate taxes and final expenses. Survivorship life insurance provides immediate liquidity upon the death of the second spouse, helping to avoid the forced sale of valuable or illiquid assets such as real estate, business interests, or investment portfolios.

Example: A couple with a $35 million estate primarily composed of real estate and business equity could face millions in estate taxes. A survivorship policy can provide the necessary funds to cover these taxes, preserving the family assets for future generations.

Preserving wealth and legacy for heirs

This type of insurance helps ensure that heirs receive their intended inheritance undiminished by taxes or debt obligations. It can also support estate equalization, especially in situations involving illiquid or unevenly distributed assets.

Example: One child may inherit a family business, while another receives insurance proceeds, ensuring a balanced distribution of wealth.

Enabling charitable and philanthropic goals

Survivorship policies can be structured to support philanthropic endeavors. Policy proceeds can be directed to charitable organizations, foundations, or donor-advised funds, enabling clients to create enduring legacies aligned with their values.

Example: A couple might designate a portion of their death benefit to fund a scholarship program or make a significant gift to a favorite nonprofit, leaving a lasting impact.

Survivorship life insurance vs. single-insured life insurance policies

While both types of policies serve important purposes, their use cases differ significantly. Single-insured life insurance pays a death benefit upon the death of one individual and is commonly used for income replacement, debt repayment, or immediate family support.

In contrast, survivorship policies are more strategic and estate-focused. Their delayed payout aligns with estate tax timing, making them ideal for funding estate settlement costs.

Cost is another differentiator—survivorship policies tend to be more affordable than two individual permanent policies due to the delayed risk exposure for the insurer. Underwriting is also more lenient; a policy may be issued even if one spouse has health concerns, provided the second spouse is insurable.

Scenario Comparison:

• Single-life: A breadwinner purchases insurance to ensure a surviving spouse can maintain their standard of living.
• Survivorship: A couple uses a survivorship policy to provide estate liquidity, ensuring their children receive undivided wealth.
  

When to recommend survivorship life insurance

Recognizing the right time and client profile for recommending survivorship insurance is key to maximizing its value.

Advisor perspective: Ideal client scenarios

Financial advisors should consider recommending survivorship policies to clients with:

• Large estates subject to estate taxes.
• Significant illiquid holdings (e.g., real estate, businesses).
• Strong legacy or philanthropic intentions.
• An interest in estate equalization among heirs.
  

Initiating the conversation can begin with a simple estate review, focusing on potential tax liabilities, asset liquidity, and distribution goals.

Client perspective: Evaluating personal fit

Clients can assess their suitability by considering:

• Is our estate large enough to face estate taxes?
• Do we have sufficient liquid assets to cover those taxes?
• Are we concerned about how our wealth will be distributed?
• Do we want to leave a legacy or charitable gift?
  

Answering “yes” to any of these questions suggests that survivorship insurance may be a valuable addition to their estate plan.

How to fund survivorship life insurance

Proper structuring and funding are essential to maximize the policy’s benefits and minimize estate tax exposure.

Utilizing irrevocable life insurance trusts (ILITs)

An ILIT is a legal entity that owns the insurance policy outside the insureds’ estates. By removing the policy from the taxable estate, an ILIT ensures that the death benefit is not subject to estate tax.

Example: A couple establishes an ILIT to purchase and hold their survivorship policy. Upon their deaths, the trust receives the death benefit and uses it to provide liquidity to the estate to pay estate taxes, while shielding the funds from taxation.

Strategic funding of premiums

Funding strategies should align with the couple’s overall financial picture. These may include:

• Annual exclusion gifts to the ILIT.
• Lump-sum gifts within lifetime exemption limits.
• Leveraging existing assets or cash flow from investments.
  

Long-term premium management is vital, and advisors can help by creating a multi-year funding plan that avoids gift tax issues.

Common pitfalls and how to avoid them

Despite its advantages, survivorship life insurance can be underutilized or misapplied due to several common mistakes:

• Waiting too long: Delaying purchase can result in higher premiums or uninsurability.
• Overlooking spousal income needs: This policy doesn’t pay out until both spouses die, leaving a potential gap for the surviving spouse.
• Neglecting trust ownership: Without an ILIT, the policy proceeds may be subject to estate tax.
• Mismanaging premiums: Failing to plan funding may lead to policy lapse.
• Lack of coordination: Failing to integrate with the broader estate plan can lead to inefficiencies.

Advisors and clients should work closely to address these issues early and ensure the policy is properly aligned with overall estate goals.

Conclusion

Survivorship life insurance is a powerful estate planning tool for high-net-worth families seeking to preserve wealth, provide liquidity, and fulfill legacy intentions. By paying out only after both insured individuals pass away, it aligns perfectly with estate settlement timing and can be structured to optimize tax outcomes through strategies like ILITs.

Whether your goal is to protect heirs, fund charitable causes, or equalize asset distribution, survivorship life insurance offers a flexible, cost-effective solution. Advisors and clients alike should consider how this policy fits within their broader estate planning strategy.

To simplify the complexities of estate planning and policy administration, consider leveraging Vanilla’s estate planning software. It enhances advisor-client collaboration, ensures accurate documentation, and streamlines the entire process—turning intricate plans into actionable outcomes.

 

The information provided here does not constitute legal, financial, or tax advice. It is provided for general informational purposes only. This information may not be updated or reflect changes in law. Please consult with an estate attorney, financial advisor, or tax professional who can advise as to your particular situation.