What Is a Survivorship Life Insurance Policy?

Survivorship life insurance is a specialized option designed to cover two lives. Its defining characteristic is that the death benefit is paid out only after the second of the two insured individuals passes away. This distinct feature makes it suitable for specific financial planning needs, differing significantly from policies that cover a single person or pay out on the first death.

Defining Survivorship Life Insurance

Survivorship life insurance, often referred to as “second-to-die” life insurance, is a single policy that insures two individuals simultaneously. This type of coverage is designed to disburse the death benefit only after both insured parties have died. This structure is a primary differentiator from “first-to-die” joint policies, which pay out upon the first death among the insured individuals. This arrangement typically involves spouses, business partners, or other pairs with a shared financial interest. The policy’s design ensures that the death benefit is available to beneficiaries, such as children, a trust, or a charitable organization, after both insured individuals are no longer living.

Policy Mechanics

Survivorship life insurance policies operate on a principle of joint coverage where premiums are paid to maintain the policy for two insured lives. These premiums may be paid jointly by both insured individuals, by one party, or by an entity such as a trust. The policy remains in force as long as premiums are paid, and the death benefit is triggered only upon the passing of the second insured person. This means that the surviving insured individual must continue premium payments to keep the policy active until their own death.

Many survivorship policies are permanent life insurance, such as whole life or universal life, which means they can accumulate cash value over time. This cash value grows on a tax-deferred basis, and it can potentially be accessed by the policy owner through policy loans or withdrawals. However, accessing the cash value can reduce the death benefit and may have tax implications. Survivorship policies can cover various pairings, most commonly married couples, but also parent-child relationships or business partners.

Common Applications

Survivorship life insurance policies are utilized in various strategic financial planning contexts due to their deferred payout structure.

Estate Liquidity

One common application is for estate liquidity, where the policy provides funds to cover federal estate taxes and other settlement costs that arise after the death of the second individual. For instance, with the federal estate tax exemption at $13.61 million per individual in 2024, a survivorship policy can provide a substantial, tax-efficient sum to heirs to prevent the forced sale of illiquid assets to satisfy tax obligations.

Charitable Giving

Another use is in charitable giving. Individuals can use a survivorship policy to leave a substantial legacy to a charity. By naming a charitable organization as the beneficiary, the death benefit is paid directly to the charity upon the second death, enabling a larger donation than might otherwise be possible through direct cash contributions during their lifetime. This approach allows for a planned, future gift without impacting current assets.

Business Succession Planning

In the business realm, survivorship policies are instrumental in business succession planning, particularly for funding buy-sell agreements between partners. Upon the death of the second partner, the policy’s proceeds can provide the surviving partner(s) or the business entity with the necessary capital to purchase the deceased partners’ ownership interests from their heirs. This ensures a smooth transition of ownership, maintains business continuity, and provides fair market value to the deceased partner’s estate without disrupting business operations or requiring the sale of company assets.

Special Needs Planning

Survivorship life insurance also plays a role in special needs planning. It can fund a special needs trust (SNT) established for a dependent child or adult with disabilities. The policy’s payout upon the second parent’s death ensures that the SNT receives funds to provide for the individual’s long-term care and supplemental needs, such as education and therapy, without jeopardizing their eligibility for government benefits like Medicaid or Supplemental Security Income (SSI).

Policy Ownership and Beneficiaries

The ownership structure of a survivorship life insurance policy determines control and tax implications. Policies can be owned directly by the insured individuals, typically a married couple. However, for estate tax planning purposes, it is common for a third party, such as an Irrevocable Life Insurance Trust (ILIT), to own the policy. When an ILIT owns the policy, the death benefit proceeds are generally excluded from the taxable estates of the insured individuals, provided certain conditions are met, such as the insured surviving for at least three years after transferring an existing policy to the trust.

Designating beneficiaries ensures the death benefit is distributed according to the policy owner’s wishes. Beneficiaries are the individuals or entities who will receive the policy proceeds upon the second insured’s death. It is important to clearly name both primary beneficiaries, who are the first in line to receive the benefit, and contingent beneficiaries, who would receive the benefit if the primary beneficiaries are no longer living or cannot be located. The policy owner can typically change beneficiaries, though this depends on the policy’s specific terms and ownership.