How Survivorship Life Insurance Policies Help Estate Planning

Survivorship life insurance, often called “second-to-die” insurance, covers two individuals under a single policy. It pays out a death benefit only after both insured individuals have passed away. Unlike traditional policies that pay upon the first death, survivorship policies align with financial planning goals that extend beyond the immediate needs of a surviving partner. This unique structure makes it a relevant tool for individuals considering how to transfer wealth and manage future financial obligations for their beneficiaries.

Fundamentals of Survivorship Life Insurance

Survivorship life insurance operates on a “second-to-die” payout mechanism, meaning the death benefit is distributed to beneficiaries solely after the passing of the second person insured on the policy. This characteristic differentiates it from other joint life insurance options, such as “first-to-die” policies, which provide a payout upon the death of the initial insured individual. While typically purchased by married couples, these policies can also cover other pairs with shared financial interests, including business partners or a parent and child.

The premiums for survivorship life insurance are generally lower than the combined cost of purchasing two separate individual permanent life insurance policies for the same coverage amount. This cost efficiency stems from the insurance company’s delayed payout, as the benefit is not disbursed until both insured individuals have died, extending the period over which premiums are collected. Survivorship policies are typically permanent life insurance, commonly issued as whole life or universal life policies, offering lifelong coverage and often accumulating cash value over time. When the death benefit is paid out, it is generally received by the beneficiaries free of federal income taxes.

Addressing Estate Liquidity Needs

Estates often contain substantial illiquid assets, such as real estate, family businesses, or valuable collections, which are not easily converted into cash without potentially significant losses. When estate taxes, administrative expenses, and other settlement costs become due, often within nine months of death, these illiquid assets can present a considerable challenge for heirs. Without sufficient cash, beneficiaries may be forced to sell these cherished or income-producing assets quickly, potentially below their market value, to meet immediate financial obligations.

Survivorship life insurance directly addresses this problem by providing a substantial, income tax-free cash payout upon the death of the second insured individual. This timing is particularly beneficial because federal estate taxes, for larger estates, generally become due after the second spouse passes away. In 2025, the federal estate tax exemption is $13.99 million per individual or $27.98 million for married couples. Estates exceeding this threshold can face federal estate tax rates as high as 40% on the value above the exemption.

The death benefit from a survivorship policy creates immediate liquidity, enabling heirs to pay these taxes, probate costs, legal fees, and other estate settlement expenses without disturbing the estate’s core assets. This cash influx helps preserve the integrity of the estate, preventing the need for distressed sales of family properties or businesses and ensuring that the intended legacy remains intact for future generations. The policy effectively acts as a designated fund for these post-death financial requirements, offering peace of mind to the policyholders.

Supporting Inheritance Equalization and Philanthropic Goals

Survivorship life insurance policies can be instrumental in achieving equitable wealth distribution among heirs, particularly when an estate includes a primary illiquid asset like a family business or a significant piece of real estate. In such scenarios, one heir might inherit the illiquid asset, while other heirs could receive cash from the life insurance death benefit. This strategy ensures that all beneficiaries receive a fair share of the overall estate value, preventing potential disputes and maintaining family harmony.

The policy’s cash payout at the second death provides a flexible tool for estate administrators to balance the inheritance, even if the primary assets are not easily divisible. For example, if a family farm is passed to one child who wishes to continue its operation, the life insurance proceeds can provide an equivalent financial inheritance to siblings who are not involved in the farm. This allows the family to keep the business or property intact while still providing financial equity to all heirs.

Beyond family beneficiaries, survivorship life insurance also offers a powerful mechanism for philanthropic endeavors. Individuals can designate a charity as a beneficiary of the policy, allowing them to make a significant future gift that might exceed what they could contribute during their lifetimes. This approach enables policyholders to leave a substantial legacy to a chosen cause, with the death benefit providing a guaranteed source of funding for the charitable organization. The policy facilitates a larger impact on the designated charity without diminishing other assets intended for family members.

Structuring Policy Ownership for Estate Planning

For survivorship life insurance to effectively serve its estate planning purposes, particularly in minimizing estate taxes, its ownership structure is paramount. The most common and effective method involves placing the policy within an Irrevocable Life Insurance Trust (ILIT). An ILIT is a legal entity specifically designed to own life insurance policies, and its terms generally cannot be altered or revoked once established.

The primary reason for using an ILIT is to ensure that the death benefit proceeds are not included in the taxable estates of either insured individual, thereby avoiding federal estate taxes on the insurance payout itself. If the insureds were to own the policy directly, the death benefit would typically be considered part of their taxable estate, potentially pushing the estate over the federal exemption threshold and subjecting the proceeds to estate tax. By transferring ownership to the ILIT, the policy is held outside the insureds’ personal estates, allowing the death benefit to pass to beneficiaries free of estate tax.

In an ILIT arrangement, the trust, through its designated trustee, owns the policy, pays the premiums, and receives the death benefit upon the second insured’s passing. The trustee then distributes the proceeds according to the specific terms outlined in the trust agreement, which can include provisions for paying estate taxes, providing for beneficiaries, or funding charitable gifts. It is important to note that if an existing policy is transferred into an ILIT, the insureds must survive for at least three years after the transfer for the death benefit to be excluded from their taxable estate. However, if the ILIT is established first and then purchases a new policy, this three-year rule typically does not apply. Due to the complexities involved in establishing and managing an ILIT, engaging an experienced estate planning attorney is essential to ensure proper structuring and compliance with all legal and tax requirements.