Protecting your loved ones goes beyond traditional life insurance. Survivorship life insurance is a joint policy covering two people and pays out a death benefit only after both policyholders have died. Many assume life insurance provides funds immediately after the first death, but survivorship insurance works differently, providing money only when both policyowners have passed.
This policy is ideal for couples, business partners, or families looking to leave a legacy, cover estate taxes, or fund long-term plans. In this article, you’ll learn how survivorship life insurance works, who benefits most, and what to consider before choosing a policy that pays a benefit after both policyholders pass away.
What Is Survivorship Life Insurance?
Survivorship life insurance, also known as second-to-die insurance, is a type of permanent life insurance policy that covers two people—most often a married couple—and pays out the death benefit only after the second insured person passes away.
Unlike individual life insurance policies that pay out when one person dies, this joint policy is structured to provide a financial benefit for the next generation or a specific long-term goal. Because the payout is delayed until both individuals have passed, the life expectancy for the policy is longer, which often results in lower premium payments compared to purchasing two separate permanent life insurance policies.
How Does Second-to-Die Insurance Work?
The mechanics of a second-to-die policy are simple and methodical, designed for a specific purpose. Understanding the process is key to seeing its value.
A Single Policy Covers Two Lives: You purchase one policy that jointly insures two individuals.
Premiums Are Paid: You pay regular premiums to keep the policy active. These premiums are typically lower than the combined cost of two comparable individual policies because the insurance company’s risk is spread over two lifespans.
The First Person Passes Away: When the first insured person dies, the policy remains active, but no death benefit is paid out. The surviving insured individual continues to be covered without needing to make further premium payments in many cases (depending on the policy structure).
The Second Person Passes Away: After the second insured person dies, the full, tax-free death benefit is paid to the named beneficiaries.
Who Is Survivorship Life Insurance For?
While not a one-size-fits-all solution, survivorship life insurance provides significant value for specific financial situations. It’s an effective tool for those with clear, long-term legacy goals.
High-Net-Worth Couples: Its most common use is for estate planning. The death benefit can provide immediate, tax-free liquidity for heirs to pay federal estate taxes, preventing the need to sell off assets like a family business, property, or valuable heirlooms to cover the tax bill.
Parents of a Child with Support Needs: For families with a dependent who will require lifelong care, a second-to-die policy can be an ideal way to fund a support needs trust. The payout ensures that financial resources become available precisely when both parents are no longer able to provide care.
Business Owners: Business partners can use a survivorship policy to fund a buy-sell agreement. When the second partner dies, the benefit provides the capital needed for the remaining partners or the business entity to buy out the deceased partner’s shares from their heirs, ensuring smooth business succession.
Philanthropic Individuals: Couples who wish to leave a substantial legacy to a charity, university, or foundation can name the organization as the beneficiary. This allows them to make a significant, planned gift that might not have been possible otherwise.
Pros and Cons of Survivorship Life Insurance
To make an informed decision, it’s crucial to weigh the advantages and disadvantages. This type of policy offers unique benefits but also comes with limitations that must be considered.
Advantages of Second-to-Die Insurance
Lower Premiums: Because the policy pays out after two deaths instead of one, the joint life expectancy is longer. This reduces the risk for the insurer, resulting in more affordable premiums compared to two separate permanent policies with the same death benefit.
Easier Underwriting: If one of the two individuals has health issues that would make it difficult or expensive to qualify for individual life insurance, they may still be approved for a survivorship policy. The healthier partner’s life expectancy helps balance the risk.
Builds Cash Value: Like other forms of permanent life insurance, these policies accumulate cash value over time on a tax-deferred basis, which can be borrowed against if needed.
Effective Estate Planning Tool: It provides a tax-free lump sum precisely when estate taxes are due, protecting the value of the estate for the intended heirs.
Disadvantages of Second-to-Die Insurance
No Payout After the First Death: This is the most significant drawback. The policy is not designed to provide financial support for the surviving spouse. If income replacement is a primary goal, individual policies are a better fit.
Potential Complications in a Divorce: If a couple separates, the policy can become complicated. They may need to decide whether to continue paying premiums, surrender the policy for its cash value, or attempt to split it, which isn’t always possible.
Less Flexibility: The policy is designed for a singular, long-term goal. It doesn’t offer the same flexibility as individual policies, which can be managed or changed independently.
Frequently Asked Questions (FAQ)
Here are answers to some of the most common questions about second-to-die policies.
Is survivorship life insurance cheaper than two individual policies?
Yes, in most cases. Because the policy is based on the joint life expectancy of two people, the risk to the insurance company is lower, which translates to more affordable premiums for the same amount of coverage compared to buying two equivalent individual permanent life insurance policies.
What happens to a second-to-die policy if the couple gets divorced?
Divorce can create complications. The couple will need to decide how to handle the policy. Options may include surrendering it for its cash value (which is then split), having one ex-spouse take over premium payments, or continuing to pay jointly for the benefit of their children. Policy terms vary, so consulting with a financial advisor is essential.
Can unmarried couples or business partners get survivorship life insurance?
Absolutely. While most commonly used by married couples, any two individuals with a shared insurable interest can purchase a policy. This makes it a viable option for domestic partners, siblings who co-own property, or business partners funding a succession plan.