Industry Experience

Survivorship Life Insurance

Survivorship life insurance, also known as last-to-die insurance or second-to-die insurance, insures two lives, and pays a death benefit after the death of both insureds. Generally, the premium required is less than that for comparable insurance on either individual life, since the odds of two individuals dying during any given year are substantially less than of one individual dying.

While the many potential uses of survivorship life include charitable gifts, family income for surviving children, key person insurance, and funding installment sales within a family (chart, page 39); survivorship life is most often used to fund the payment of estate taxes, when the marital deduction defers taxes until the death of both spouses. Survivorship life offers the advantage of simplicity by paying a death benefit exactly when taxes are due – upon the second death. With a rated or uninsurable client, coverage can usually be obtained, provided the spouse is insurable at standard rates.

There are some disadvantages to relying solely upon survivorship life insurance to fund the payment of estate taxes. For example, when the marital deduction is used to defer all estate taxes until the second death, appreciation of assets in the surviving spouse’s estate can substantially increase total estate taxes. The flexibility provided by the use of disclaimers may be severely limited when there are no funds for payment of estate taxes at the first spouse’s death. After divorce the unlimited marital deduction is no longer available, unless the bulk of the estate is left to a new spouse.

Split-dollar is often used to pay premiums on a survivorship policy funding a life insurance trust. The value of the gift to the trust can be substantially reduced by using the very low joint life rates that measure the probability of two deaths in one year. Use of low joint life rates allows substantial coverage to be purchased within the “present interest” limits. But it must be recognized that no death benefit will be paid until both insureds have died. This means that a survivorship policy must generally be funded for longer periods then a policy insuring just one individual. Also, after the first death, the value of the gift to the trust will be measured using higher single life rates. This amount could exceed the $14,000 (as indexed in 2017) annual exclusion limit for present interest gifts.