Insurance Curator High-net-worth (HNW) families in the United States commonly use survivorship (second-to-die) life insurance in combination with irrevocable life insurance trusts (ILITs) and other trust structures to create liquidity, mitigate estate tax exposure, and preserve family wealth for successors. This article explains how these components work together, gives practical funding and premium strategies, and compares typical outcomes for estates in major U.S. markets such as New York City, Los Angeles, and Miami.
What is a Survivorship (Second-to-Die) Policy?
A survivorship policy covers two lives and pays a death benefit only after the second insured dies. This is especially useful for estates where the tax liability typically arises at the second death — the point when the surviving spouse’s estate is finally transferred.
- Primary purpose: Fund estate taxes, probate costs, business succession obligations, or equalize inheritances.
- Common structures: Survivorship universal life (SUL), survivorship whole life, or survivorship guaranteed universal life (GUL).
Authoritative background: Investopedia explains the mechanics and common uses of survivorship policies. (See: https://www.investopedia.com/terms/s/survivorshiplifeinsurance.asp)
Why Pair a Survivorship Policy with an ILIT?
An ILIT (Irrevocable Life Insurance Trust) is a specialized trust designed to own life insurance policies so proceeds can be excluded from the insured’s taxable estate.
Key advantages when combined with a survivorship policy:
- Estate tax exclusion: If the ILIT is properly drafted and the policy is owned by the ILIT (not the insureds), the death benefit is generally excluded from the insureds’ estates for federal estate tax purposes.
- Liquidity at second death: Proceeds provide cash to pay federal and state estate taxes, administration costs, or to buy out heirs/partners.
- Control and creditor protection: The trustee controls distributions, limiting creditor claims and protecting beneficiaries.
- GST planning: ILITs can be structured to allocate generation-skipping transfer (GST) exemption to protect trusts for grandchildren or later generations.
Legal/tax considerations (U.S.-focused): IRS estate tax rules and current exemption thresholds are central to planning; review the IRS estate tax resource for official guidance. (See: https://www.irs.gov/businesses/small-businesses-self-employed/federal-estate-tax)
How the Mechanics Work — Step-by-Step
- Formation of the ILIT: Grantors (typically spouses) create an ILIT and name a trustee and beneficiaries.
- ILIT purchases a survivorship policy: The ILIT either buys a new second-to-die policy or receives an existing policy by assignment (with care to avoid estate inclusion under the 3-year lookback rule).
- Funding premium payments: Grantors make annual cash gifts to the ILIT. The ILIT then pays the policy premiums. To avoid gift tax or to use annual exclusion, ILITs often use Crummey withdrawal powers.
- Policy ownership & administration: Because the ILIT is the policy owner, proceeds at second death pay to the trust, not the deceased’s estate — keeping the death benefit out of the taxable estate.
- Trust distribution plan: The trustee distributes or holds proceeds per trust terms to pay taxes, equalize inheritances, or fund a family limited partnership (FLP) or buy-sell obligations.
Premium Funding Strategies for HNW Estates
HNW families typically use one or more of these premium funding techniques:
- Annual exclusion gifts + Crummey letters: Grantors gift cash to the ILIT each year and provide beneficiaries a temporary right to withdraw to qualify for the annual gift tax exclusion (2024 exclusion indexed annually — check current IRS amounts).
- Lifetime taxable gifts/using lifetime exemption: For larger premiums, grantors may use part of their lifetime gift tax exemption.
- Gifts from trusts or entities: Family partnerships or S-corp distributions to shareholders can fund ILIT gifts.
- Self-funding via policy loans/dividends (where applicable): Some permanent products can build cash value; however this can complicate estate inclusion and is not typical for pure estate-liquidity planning.
Pricing Reality — Carriers, Illustrative Ranges, and Market Examples
Large mutual insurers and carriers that routinely underwrite survivorship products for HNW clients include New York Life, MassMutual, Prudential, and Lincoln Financial. Pricing depends on ages at issue, health class, policy type (GUL vs. SUL vs. whole), and underwriting.
Illustrative market ranges (collected from industry analyses and broker guidance — examples are illustrative; actual quotes vary by carrier and underwriting):
- For a healthy couple age 55/54 seeking $5 million survivorship GUL: approx. $12,000–$30,000/year.
- For a couple age 65/64, same $5M: approx. $30,000–$75,000/year.
- For a couple age 75/74, same $5M: approx. $90,000–$200,000/year.
Policygenius and other broker resources explain that survivorship products tend to be less expensive than buying two single-life policies for the same total face amount but the one-time payment triggers at second death only. (See: https://www.policygenius.com/life-insurance/second-to-die-life-insurance/)
Table — Illustrative Annual Premium Ranges for $5M Survivorship Coverage (U.S., 2023–24 market examples)
| Issue Ages (Couple) | Product Type | Annual Premium Range (illustrative) |
|---|---|---|
| 55 / 54 | GUL / SUL | $12,000 – $30,000 |
| 65 / 64 | GUL / SUL | $30,000 – $75,000 |
| 75 / 74 | Guaranteed Whole / GUL | $90,000 – $200,000 |
Note: These are broad market ranges; insurers and brokers (e.g., New York Life, MassMutual, Prudential) provide firm quotes based on detailed underwriting.
State-Specific Considerations: New York, California, Florida, Texas
- New York (NYC area): High median estate values and potential state estate tax exposure make ILIT + survivorship solutions common. New York has its own estate tax rules and exemption amount lower than federal for many estates; plan accordingly.
- California (San Francisco / Los Angeles): No state estate tax, but high property values and community property rules (for married couples) can impact planning choices and ownership titling.
- Florida (Miami): No state income tax or estate tax; many HNW individuals relocate here for tax and asset-protection strategies while preserving estate planning structures.
- Texas (Houston / Dallas): No state estate tax; though business succession and commercial real estate exposures often require liquidity planning.
Because of state estate tax differences and local probate rules, always coordinate ILIT and survivorship design with local estate counsel.
Trust Structure Variations & Complexities
- Standalone ILIT owning the survivorship policy: Classic design for estate tax exclusion.
- ILIT + Family Limited Partnership (FLP): ILIT may be a minority partner in an FLP used to shift asset ownership while preserving voting/control—often paired with discounts for gift/estate valuation planning.
- QTIP / Marital trusts and portability: Survivorship proceeds can be used to equalize or fund QTIP elections; portability of unused federal exemption at death may change sizing decisions.
- Dynasty trusts / GST planning: For multigenerational wealth transfer, coordinate GST exemption allocation within the ILIT.
Complexities to watch:
- 3-year lookback rule: If an insured transfers a policy to an ILIT and dies within three years, proceeds may be includable in the estate — plan early or use alternatives.
- Crummey letter administration: Poorly administered Crummey notices can result in taxable gifts and adverse IRS treatment.
- Insurable interest & transfer rules: Proper documentation and formal ownership steps must be taken to avoid unintended inclusion.
Common Uses: Estate Tax Payment, Business Succession, Equalization
- Fund federal/state estate taxes and administration costs at second death.
- Provide liquidity for buy-sell agreements or to redeem shares in a family business — see how these techniques interact with buy-sell planning in practice: Using Survivorship Policies to Fund Buy-Sell Agreements and Business Succession.
- Design coverage amount and premium strategies for large estates: Designing Survivorship Policies for Large Estates: Coverage Amounts and Premium Strategies.
- Compare second-to-die vs single-life choices to judge flexibility and cost tradeoffs: Second-to-Die vs Single-Life Policies: Cost, Purpose, and Estate Planning Tradeoffs.
Practical Next Steps (Checklist for HNW Families and Advisors)
- Obtain up-to-date federal and state estate tax projections for the relevant jurisdictions (NYC, CA, FL, TX).
- Price survivorship quotes from at least 3 carriers (e.g., large mutual carriers and brokerage-managed programs).
- Draft and fund an ILIT before premiums become due — be mindful of the 3-year transfer rule.
- Coordinate GST allocations and gift-tax reporting with tax counsel.
- Model multiple scenarios (e.g., second death timing, market returns, premium payment sources) to stress-test outcomes — see related scenario modeling guidance: Real-World Scenarios: Modeling Survivorship Policy Outcomes for Multigenerational Families.
Sources
- Investopedia — Survivorship Life Insurance overview: https://www.investopedia.com/terms/s/survivorshiplifeinsurance.asp
- Policygenius — Second-to-Die Life Insurance guide: https://www.policygenius.com/life-insurance/second-to-die-life-insurance/
- Internal Revenue Service — Federal estate tax information: https://www.irs.gov/businesses/small-businesses-self-employed/federal-estate-tax