Survivorship Life Insurance

Survivorship life insurance, also called second-to-die insurance, is a permanent life insurance policy written on two lives that pays its death benefit once, when the second insured dies. The first death changes nothing about the contract except that one insured remains; the premium continues and the coverage continues. The two insureds are usually spouses, but they do not have to be, and business partners are the other common pairing.

The label people confuse it with is joint life insurance, and the difference is which death triggers payment. Washington's Office of the Insurance Commissioner describes joint life as often cheaper than buying two separate policies, notes that "the policy usually only pays the death benefit on the first to die," and then records separately that "some companies issue 'second or last to die' policies for estate planning." So joint life pays at the first death and survivorship pays at the last, and the second is a different product bought for a different reason rather than a variant of the first.

Why it costs less than insuring either person alone. The insurer's promise is to pay when both insureds have died, and the probability that both have died by any given year is lower than the probability that either one has. A shorter way to see it: the insurer is effectively insuring the longer of the two lifetimes rather than the shorter one, and the longer lifetime is the one that defers the claim. The gap between a survivorship premium and two individual premiums for the same total face amount is therefore not a discount the insurer is offering; it is the price of a different and later promise.

The underwriting consequence follows from the same arithmetic, and it is the reason many of these policies get written. Because the claim only arrives at the second death, a serious health problem on one of the two lives moves the price much less than it would on a single-life policy. A couple in which one person has been declined or heavily rated as an individual can often obtain survivorship coverage at an ordinary price, and some insurers will issue where one of the two is entirely uninsurable on their own. That is a genuine structural feature rather than a sales point, and it is worth knowing before concluding that a household with a health history cannot be covered.

The liquidity case, stated as mechanism rather than as a tax result. A married couple's transfer-tax exposure is generally deferred at the first death, because property passing to a surviving citizen spouse qualifies for the unlimited marital deduction and the unused portion of the first spouse's exclusion can be preserved for the survivor. The consequence is that the estate's cash obligation, where one exists, tends to land at the second death. If what the estate holds is a business, a farm or real property rather than cash, the heirs may have to sell the asset the plan exists to keep in order to pay. A death benefit that arrives on the day of the second death is cash on the date the obligation falls due, which is why the timing match, rather than the cost, is the argument for the product. The same timing logic applies to a privately held business with two owners and to a family that wants to equalize an inheritance between a child who takes over an illiquid asset and one who does not.

Two structural cautions that follow from the payout timing. The first is that nothing is paid at the first death, so a household that also needs income replacement if one spouse dies young needs separate coverage for that; a survivorship policy does not answer it. The second is ownership. Where the policy is bought to create liquidity for an estate, whether the proceeds are themselves counted in that estate turns on the incidents of ownership the insureds held, which is the reason these policies are frequently owned by an irrevocable life insurance trust rather than by the insureds. That is a separate decision with its own rules and its own three-year clock on an existing policy, and it should be made before the policy is issued rather than corrected afterwards.

Two people apply on one application and are underwritten together. The insurer prices a single contract to pay at the second death, and issues one policy with one face amount. Premiums are paid on the one contract. When the first insured dies, the survivor keeps paying and the coverage continues unchanged; some contracts allow the policy to be split into two individual policies on a stated event, which is a contract term to check rather than a general feature. When the second insured dies, the beneficiary is paid the face amount.

A hypothetical, to show the timing rather than the price. Suppose a couple own a business appraised at $6,000,000 and almost no liquid assets, and they expect the settlement of the second estate to require roughly $900,000 in cash for taxes, debts and administration. Two individual policies of $450,000 each would pay $450,000 at the first death, when nothing is owed, and $450,000 at the second, which is $450,000 short of the obligation unless the first payment was preserved untouched for years. One survivorship policy of $900,000 pays the whole amount on the date the obligation arises. The dollar figures are invented to show the structure; what a particular estate would owe depends on its own facts and on the law in force when the second death occurs.

The practical check on that structure is whether the need really does sit at the second death. If the household would also be in difficulty on the first death, that is a separate need with a separate answer, and buying a survivorship policy does not meet it.

Pros

• The payment arrives at the second death, which is when a married couple's estate settlement costs generally fall due.
• It is cheaper than two individual policies with the same combined face amount, because the insurer is promising a later payment.
• A health impairment on one of the two lives is far less costly than it would be on an individual policy, and a couple where one person is uninsurable alone can often still be covered.
• It creates cash for an illiquid estate on the day it is needed, which is the specific problem a family business or a farm has.
• One contract and one premium instead of two policies to maintain.

Cons

• Nothing at all is paid when the first insured dies, so it does not answer an income-replacement need and should not be bought as though it does.
• It is permanent coverage, so the premium is a multiple of term pricing and the commitment runs for decades.
• The case for it usually rests on assumptions about transfer-tax law that may change long before the second death.
• Whether the proceeds stay outside the taxable estate depends on ownership, which means the trust decision has to be made correctly at the outset.
• Divorce, or a business partnership that ends, leaves a contract written on two lives whose interests have separated, and the options for unwinding it are set by the policy.