Survivorship Life Insurance: Pros, Cons, and Providing Liquidity

Survivorship life insurance, also known as second-to-die life insurance, is a unique form of joint life insurance coverage designed to provide financial protection after both insured individuals pass away.

Unlike traditional life insurance policies, which pay a death benefit upon the death of the first policyholder, survivorship life insurance pays the death benefit only after both policyholders have passed.

This type of policy can be a powerful financial tool for estate planning, providing liquidity to cover estate taxes, and ensuring a smooth transfer of wealth to beneficiaries. In this article, we’ll delve into the key benefits and potential drawbacks of survivorship life insurance and explore its critical role in providing liquidity for estate planning.

What is Survivorship Life Insurance?

Survivorship life insurance is designed to cover two individuals, typically a married couple or business partners. Unlike traditional life insurance policies, which pay out when one person dies, survivorship life insurance policies only pay out once both insured individuals have passed. It’s commonly used as part of estate planning strategies, particularly for high-net-worth individuals who may face substantial estate taxes.

The policy generally falls under the category of permanent life insurance, such as whole life or universal life, meaning that it provides coverage for the entire lifetime of the insured individuals. Survivorship life insurance offers the advantage of cash value accumulation, which can grow over time and be accessed for various financial needs.

Pros of Survivorship Life Insurance

1. Estate Planning and Tax Benefits

One of the primary advantages of survivorship life insurance is its role in estate planning. High-net-worth individuals often face significant estate taxes when their estate is transferred to their heirs. These taxes can be a substantial burden, requiring the sale of assets or property at potentially distressed prices to cover the tax liabilities. Survivorship life insurance can help mitigate this issue by providing a death benefit that can be used to pay estate taxes.

The death benefit from a survivorship policy is typically paid to the beneficiaries after both insured individuals pass away. This provides liquidity to the estate, allowing heirs to cover estate taxes, settle debts, and handle other final expenses without having to liquidate assets. For couples, this can be particularly beneficial, as estate taxes are often not triggered until both spouses have passed.

2. Supports Large Estates

For those with large estates that exceed the federal estate tax threshold (currently $13.99 million for individuals in 2025), survivorship life insurance can provide essential financial protection. The death benefit can be used to ensure that the heirs have sufficient funds to pay estate taxes without the need to sell off valuable assets like real estate, stocks, or business interests. By funding the policy with permanent coverage, it ensures that the death benefit remains intact for the beneficiaries even if the insured individuals live for many years.

3. Legacy Planning

Survivorship life insurance also offers a way to leave a lasting legacy. Many individuals use the policy to provide for a charitable cause, leaving the death benefit to a charity or religious institution. By naming a charitable organization as the beneficiary, individuals can make a significant impact on causes they care about, even after they’ve passed away. This is an attractive option for those who want to ensure their legacy continues and that they leave a positive mark on the world.

4. Lower Premiums Compared to Two Individual Policies

Survivorship life insurance is often less expensive than purchasing two separate individual policies for the same coverage amount. Since the policy only pays out after both insured individuals have passed away, the insurance company takes on less immediate risk. This typically results in lower premiums compared to two separate whole life policies. As such, it can be a more cost-effective option for couples or business partners looking to secure long-term financial protection.

5. Can Be Easier to Qualify For

Another advantage of survivorship life insurance is that it can be easier for individuals with health issues to qualify for coverage. If one partner has a significant medical condition that would make it difficult to qualify for individual life insurance, they may still be able to secure coverage if the healthy partner applies alongside them. The insurer may take on less risk by insuring both individuals as a pair, making it easier for those with health problems to qualify for coverage.

6. Provides Financial Security for Special Needs Children

Survivorship life insurance can be a valuable tool for parents with children who have special needs. If both parents pass away, the death benefit from the survivorship policy can be used to fund a special needs trust. This trust can provide lifelong financial support for the child, ensuring that their needs are met without affecting their eligibility for government assistance programs like Medicaid or Supplemental Security Income.

Cons of Survivorship Life Insurance

1. Delayed Payout

The most significant downside of survivorship life insurance is the delayed payout. Unlike traditional life insurance policies, which provide a death benefit upon the death of the first insured individual, survivorship life insurance only pays after both insured individuals pass away. This can be problematic for couples who rely on each other for financial support, as the surviving partner will not receive a payout if the first partner dies. As a result, survivorship life insurance may not be the best option for couples who need immediate financial protection.

2. Not Ideal for Single-Income Families

Survivorship life insurance is typically not the best option for single-income families. In situations where one spouse stays at home to care for children or has a lower income, the surviving spouse may not have sufficient financial support if the primary earner dies. In these cases, individual life insurance policies may be a better solution, as they provide an immediate death benefit to the surviving spouse.

3. Complexity in Divorce or Separation

If a couple with a survivorship life insurance policy divorces or separates, the policy may become difficult to manage. Survivorship policies are typically designed for couples who plan to remain together for the long term, and splitting a policy in the event of a divorce can be complicated. While it may be possible to remove a former spouse from the policy or convert the survivorship policy into two individual policies, this process may involve legal complexities and could result in higher premiums or reduced coverage.

4. Permanent Coverage Can Be Expensive

While survivorship life insurance can be less expensive than purchasing two separate policies, the premiums for permanent life insurance (such as whole life or universal life) can still be significantly higher than term life insurance. If an individual is primarily seeking life insurance to replace income or cover a specific financial need for a limited time, a term life insurance policy may be a more affordable option. Permanent policies, like those used in survivorship life insurance, are typically better suited for individuals seeking lifelong coverage.

5. No Payout Until Both Pass Away

In some cases, the policyholders may live a long time before both pass away, meaning the death benefit may not be paid for many years. This delayed payout can be a concern for beneficiaries who are relying on the policy to provide financial support immediately after one of the policyholders dies.

Providing Liquidity for Estate Taxes and Final Expenses

One of the main reasons individuals opt for survivorship life insurance is to ensure there is enough liquidity to cover estate taxes and final expenses. When both spouses or policyholders pass away, the death benefit from the policy can be used to cover taxes, funeral expenses, and other outstanding debts, without requiring heirs to liquidate assets. This is particularly important for individuals with significant wealth, as estate taxes can be substantial, and selling off assets at a discounted price may not be an ideal option.

In many cases, the policy can provide the necessary funds to ensure that heirs receive the full value of the estate without facing the burden of taxes or debt. Survivorship life insurance is an effective way to address this issue, providing peace of mind that heirs will have the financial resources needed to navigate the estate settlement process.

Conclusion

Survivorship life insurance can be a powerful tool for estate planning, providing a way to leave a legacy, address estate tax concerns, and support loved ones after both policyholders have passed away. While it offers numerous advantages, including cost savings, ease of qualification, and flexibility for special needs children, it also comes with certain drawbacks. The delayed payout, lack of immediate financial support for surviving spouses, and potential complications in divorce or separation are all factors that must be considered when deciding if survivorship life insurance is the right choice. By carefully weighing the pros and cons, individuals can determine if this type of policy is the right solution for their financial goals and estate planning needs.