How Are Survivorship Life Insurance Policies Helpful?

Life insurance generally provides financial protection to beneficiaries upon the death of an insured individual. Survivorship life insurance is a specialized form designed to cover two individuals, with the death benefit paid out only after both insured individuals have died.

Defining Survivorship Life Insurance

Survivorship life insurance is a single policy that covers two people, most commonly spouses, but it can also include business partners or other individuals with joint financial interests. Unlike traditional life insurance, the death benefit is distributed only after the second insured individual passes away. For this reason, it is often referred to as “second-to-die” life insurance.

The primary purpose of survivorship policies is for estate planning and wealth transfer, rather than providing immediate income replacement for a surviving spouse. Since the payout is deferred until the second death, it is not suitable for situations where a surviving partner would need financial support after the first death. This type of policy is distinct from “first-to-die” joint policies, which pay a benefit after the first insured person dies.

Operational Mechanics

Premiums for survivorship life insurance policies are calculated based on the joint life expectancy of both insured individuals. This joint calculation results in lower premiums compared to purchasing two separate individual permanent life insurance policies for the same coverage amount. These policies commonly utilize permanent life insurance structures, such as whole life or universal life, ensuring coverage for the entire lifespan of both insured parties.

Permanent policies may accumulate cash value over time, which grows on a tax-deferred basis. Policy ownership can be structured in various ways, including by an individual, a trust, or a partnership, with implications for control and tax treatment. Beneficiaries are designated to receive the death benefit, and precise naming ensures funds are distributed according to policyholders’ wishes. The death benefit payout occurs as a single sum, providing liquidity to the named beneficiaries.

Integrating into Estate and Financial Strategies

Survivorship life insurance policies address specific financial and estate planning objectives. One significant application is providing liquidity for estate taxes, especially for estates with substantial illiquid assets like real estate or family businesses. The death benefit can cover federal and state estate tax liabilities, preventing the forced sale of valuable assets. This ensures heirs can retain inherited property without immediate tax obligations.

They are also effective tools for wealth transfer to future generations. They allow individuals to leave a substantial legacy to heirs, such as children or grandchildren, even if the primary estate assets are not easily divisible or liquid. A policy can be structured to provide a cash inheritance to some heirs while a family business or property is passed to others, equalizing inheritances and preventing disputes.

Charitable giving can also be facilitated through survivorship life insurance. A policy can be established with a charity named as the beneficiary, allowing for a significant donation upon the second death without diminishing the inheritance intended for family members. These policies also play a role in business succession planning, providing funds for buy-sell agreements or ensuring financial stability for a surviving business partner or the business itself after both key owners pass. Policy proceeds can fund ownership transfers or provide capital for ongoing operations.

Tax Implications

The death benefit from a survivorship life insurance policy is received income tax-free by the beneficiaries. However, the inclusion of the death benefit in the taxable estate of the insured individuals depends on policy ownership.

If the insured individuals own the policy directly, the death benefit may be included in their gross taxable estate, subjecting it to federal estate taxes. To avoid this, a common strategy involves placing the policy ownership within an Irrevocable Life Insurance Trust (ILIT). When an ILIT owns the policy, the death benefit can be excluded from the taxable estate, preserving more of the estate’s value for heirs.

Gift tax considerations may arise if premiums are paid by someone other than the policy owner or if the policy is transferred. Contributions to an ILIT to cover premiums, for instance, are considered gifts and may be subject to gift tax rules, though annual gift tax exclusions apply. For permanent policies with a cash value component, growth within the policy is tax-deferred. Withdrawals or loans from the cash value may have tax implications, depending on the amount and whether they exceed the premiums paid into the policy.