Survivorship life insurance: Secure your financial legacy together

After spending your life caring for your family and pursuing your goals, you may want that legacy to continue long after you're gone. Survivorship life insurance is one way to help ensure what you leave behind will reflect the life you lived in a meaningful way, all while giving your loved ones the means to move on with confidence.

In this article, we'll discuss how survivorship life insurance works and how it helps in the estate planning process.

Survivorship life insurance, also known as second-to-die life insurance, is a type of contract that insures two lives—yours and your spouse's or yours and a business partner's. It pays out a death benefit only when both covered individuals die. It's typically a permanent insurance contract, so the insureds won't have to worry about outliving the coverage because it does not expire as long as the premiums are kept up to date.

This joint life insurance contract works similarly to individual insurance except that both parties complete an application. If a medical exam is required, each person needs to pass the exam. The coverage and premium amounts are based on both applicants' age and health. When both parties die, the beneficiaries receive the generally income-tax-free death benefit.¹

If purchased as a universal life insurance or whole life insurance contract, a survivorship policy can accumulate cash value that either of the insureds can tap into. Any withdrawals would decrease the death benefit paid out to the beneficiaries if not paid back.²

Survivorship life insurance could be ideal for families looking to lessen the tax burden for their beneficiaries or couples wanting to distribute assets across their beneficiaries equally.

Leaving qualified investments, like a traditional IRA or 401(k), to your loved ones can ensure their needs are met, but these pre-tax accounts also can leave a tax burden on beneficiaries. In most cases, accounts funded with pre-tax dollars are subject to income tax when it's time to make withdrawals. Consider that currently, the highest tax rate for an individual is 37%, but with the sunset of the Tax Cuts and Jobs Act in 2025, that rate is set to increase to 39.6% in 2026.

A death benefit from a life insurance policy is typically not subject to income tax. You could, for example, use a survivorship contract to reduce the taxable income from a traditional 401(k) while still maximizing the amount you leave as a legacy. One idea could be to take distributions from your qualified account now, pay the associated taxes and then take what's remaining to fund a survivorship life insurance contract. This strategy could leave your beneficiaries with a significantly lower tax obligation.

It is important, however, to understand your current tax situation before making any withdrawals from a qualified retirement account. Consider discussing your situation and options with a financial advisor and tax professional before moving forward.

While survivorship life insurance can help family members cover estate taxes and other fees when you pass away, the contract's value still can be included in your estate, potentially increasing the tax burden. This may become an issue if it would make your estate exceed the federal estate tax exemption threshold.

Any amount above $13.61 million in assets—the 2024 threshold for the estate tax exemption—can be subject to a gift and estate tax of up to 40%. This exemption is set to drop to $5 million in 2026.

To decrease the value of the estate, and ultimately the estate tax, some people opt for an irrevocable life insurance trust (ILIT). An ILIT is a separate entity that would own your survivorship life insurance contract, meaning the contract proceeds are excluded from your estate. This would allow you to leave a death benefit while protecting the value of your estate and maximizing what you pass on to your loved ones.

After creating an ILIT, you can fund it with a new or existing survivorship contract. For an existing contract, you first need to change the owner of the contract to the trust. You then must wait three years until the trust can be excluded from your estate, which is known as the "look-back rule." If you don't have an existing insurance contract, you can purchase a new one with the ILIT as the owner. With a new policy, only your premium payments are subject to the three-year look-back rule, not the death benefit.

As a trust, an ILIT can provide the added benefit of listing stipulations for how the money is dispersed and when and how it can be used. If you have a particular vision for your legacy in mind, this could help to ensure it.

A survivorship life insurance contract's death benefit can be used to continue care for special needs dependents to:

• Help cover the costs of a replacement caregiver
• Supplement income for a dependent to remain in a comfortable living situation

Co-owners of a business may use a survivorship life insurance contract as part of a business succession plan. The death benefit can help:

• Cover the costs of a transfer of ownership
• Pay operating expenses while ownership is transferred
• Offset costs associated with forced liquidation
• Keep the business open and operational without interruption

Like every insurance contract, survivorship life insurance has advantages and drawbacks worth considering before you decide if it's best for you and your loved ones.

• Survivorship premiums often cost less than premiums for two individual contracts.
• If one spouse doesn't qualify for individual life insurance, they still may be eligible for joint coverage.
• It's guaranteed to accumulate cash value.
• It provides lifetime coverage.

• The surviving spouse could face financial strain after one contract holder dies since there's only a payout after both parties die.
• Families with children from previous relationships or one partner with more assets may benefit more from separate insurance contracts.
• Premiums could be higher than individual coverage in some cases, depending on the age and health of the insured.

You can't always control what happens after you're gone, but you can do your best to give your family and the other crucial people in your life what they need to continue on. A survivorship life insurance contract can help continue your legacy of caring for what's important to you. Your financial advisor can help you gauge if this type of coverage makes sense for your goals.