Survivorship life insurance policies help address this problem by providing funds after the second spouse passes away. The proceeds help your heirs to cover costs, preserve key assets, mitigate estate taxes, and carry out your wishes without unnecessary financial strain.
Often referred to as second-to-die life insurance, this common approach can support long-term goals and help create a smoother transfer of assets, reflecting one of the key benefits of having an estate plan.
Common Uses of Survivorship Life Insurance in Estate Planning
Survivorship life insurance policies, sometimes referred to as last survivor policies, are designed for couples who want to protect what they are leaving behind, not just who they are leaving it to. As part of a broader estate plan, these policies are often used to provide flexibility and support long-term planning decisions.
Common uses of a survivorship life insurance policy include the following:
- Covering estate-related costs: It helps fund expenses such as taxes and administrative costs when assets are passed to heirs.
- Equalizing inheritances: It allows you to balance distributions among heirs when certain assets, such as a business or property, are not easily divided or being distributed to just one child.
- Funding special needs trusts: It provides financial support for beneficiaries who may require ongoing care.
- Supporting business succession: It helps facilitate a transition without forcing a sale at an inopportune time.
Why Survivorship Life Insurance Works in Estate Planning
Survivorship life insurance policies are structured to provide funds at a point when many estate-related obligations arise—after the second spouse passes away. This timing is what makes them different from individual policies and what allows them to address challenges that often go unresolved in traditional estate planning.
In many estates, a significant portion of wealth is tied up in assets such as real estate, investments, or a closely held business. While these assets may carry substantial value, they are not always easy to convert into cash when expenses arise, putting pressure on your heirs to make quick financial decisions during an already difficult time.
Survivorship life insurance helps address this challenge by providing liquidity to cover costs, preserve key assets, and support the distribution of your estate in accordance with your wishes. Because the policy pays out after both spouses have passed away, it aligns with the time when these needs are most relevant.
Jointly owned assets, if they’re owned as joint tenants with right of survivorship, would avoid probate at the first death, but at the second death, they would have to be probated in order to pass on to the family unless it’s properly placed into a trust.
Survivorship vs. Individual Life Insurance Policies
Survivorship life insurance policies and individual life insurance policies serve different purposes within an estate plan. While individual coverage is designed to provide support after the first death, survivorship policies focus on what happens after both members of the couple have passed away.
Because of this difference, many people use survivorship life insurance policies to address long-term planning needs, such as preserving assets or covering estate-related costs, rather than providing immediate financial support.
| Feature | Individual Policy | Survivorship Policy |
|---|---|---|
| Who Is Covered? | One person | Two people |
| When Is the Benefit Paid? | After the first death | After the second death |
| Primary Purpose | Immediate financial support | Long-term estate planning |
| Cost | Typically higher | Often lower |
| Underwriting Requirements | More strict | Often more flexible |
How Survivorship Life Insurance Works
Survivorship life insurance policies are designed to be straightforward and work alongside your broader estate plan. While the structure may sound complex at first, the process itself follows the simple sequence listed below:
- Joint application: A couple applies for the policy together.
- Premium payments: Premiums are paid over time, sometimes through an irrevocable life insurance trust as part of a larger planning strategy.
- First death: The policy remains active, and no benefit is paid at this stage.
- Second death: The death benefit is triggered after the second spouse passes away.
- Distribution: Heirs generally receive an income-tax-free lump sum that can be used to cover estate-related costs or support the transfer of assets.
- Cash value: How a policy is set up may also allow cash value to grow inside the policy during your life.
When Survivorship Life Insurance May Not Be the Right Fit
While survivorship life insurance policies can be a valuable part of an estate plan, they are not the right solution for every situation. In some cases, other planning tools or individual coverage may better align with your goals and timing needs.
Situations where this type of policy may not be the best fit include:
- Changing circumstances: Couples who are divorced or separating may need a different approach.
- Immediate coverage needs: Individual policies may be more appropriate when funds are needed after the first death.
- Health considerations: Underwriting can still present challenges depending on your circumstances.
- Smaller estates: Estates below certain thresholds may not require this level of planning.
Survivorship Life Insurance FAQ
What Happens to a Survivorship Policy if We Divorce?
Policies may be modified, split, or canceled under the terms of the policy and any agreements between spouses. Reviewing your policy as part of your estate plan can help ensure it reflects your current circumstances.
Can We Change Beneficiaries After Purchase?
In many cases, policyholders can update the beneficiaries at any time. However, this depends on who owns the policy and whether it is held in a trust, which may limit changes.
Is the Death Benefit of a Survivorship Policy Taxable?
Death benefits are generally income tax-free. However, estate tax treatment depends on how the policy is structured and who owns it.
How Does an Irrevocable Life Insurance Trust Work With This Policy?
When structured properly, an irrevocable life insurance trust can own the policy, which may help keep the proceeds outside of your taxable estate. Asset protection is a key benefit of having an irrevocable life insurance trust as part of a broader estate plan.
What if One Spouse Is Uninsurable?
In some cases, survivorship life insurance policies may still be available because underwriting considers both individuals. Eligibility and terms will depend on the specific situation.
How Much Coverage Do We Actually Need?
Coverage depends on the size of your estate, potential expenses, and your overall planning goals. Evaluating these factors as part of a broader plan can help determine an appropriate amount.
Planning That Protects What You Leave Behind
Survivorship life insurance policies can play an important role in estate planning by helping you preserve assets, manage costs, and support your long-term goals. When used as part of a broader plan, they can provide flexibility and help reduce financial strain when assets are passed to your heirs.
At Evans & Davis, our attorneys take a thoughtful, relationship-driven approach to estate planning. We work with your insurance professionals to tailor your plan to your specific needs. We work with you to understand your goals and help you build a plan that reflects your priorities and adapts as your life changes.
Call 866-708-2335 or reach out online to get clear answers and build a plan that protects what matters most.
