Insurance Curator WASHINGTON — With less than two years remaining before the scheduled "sunset" of the Tax Cuts and Jobs Act (TCJA) of 2017, high-net-worth families and estate planners are increasingly turning to survivorship life insurance policies to mitigate looming liquidity risks. This shift in strategy comes as the federal estate tax exemption is projected to be cut nearly in half on Jan. 1, 2026, potentially exposing thousands of multi-generational estates to a 40% federal tax rate on assets previously shielded.
The urgency stems from the temporary nature of the current gift and estate tax exemptions. For 2024, the Internal Revenue Service (IRS) set the individual exemption at $13.61 million, or $27.22 million for married couples. Unless Congress acts to extend the current law, those figures are expected to drop to approximately $7 million per individual, adjusted for inflation, when the TCJA provisions expire.
"We are seeing a significant uptick in inquiries regarding survivorship policies as families realize that the 'tax holiday' of the last several years is nearing its end," said Marcus Thompson, a senior wealth strategist who tracks tax policy. "For families with illiquid assets—such as real estate, private equity, or closely held businesses—the 2026 sunset creates a massive liquidity cliff. Survivorship life insurance is the primary tool being used to bridge that gap."
The Liquidity Challenge
The primary challenge for multi-generational estates is not just the tax bill itself, but how to pay it. Federal estate taxes are generally due in cash within nine months of the owner’s death. For families whose wealth is tied up in a family business or sprawling real estate holdings, paying a 40% tax on the value of those assets often requires a "fire sale" of the assets themselves to generate the necessary cash.
Survivorship life insurance, also known as "second-to-die" insurance, covers two individuals—typically spouses—and pays out the death benefit only after the second person passes away. Because the federal estate tax is usually deferred until the death of the surviving spouse through the unlimited marital deduction, the timing of the policy payout aligns perfectly with the timing of the tax liability.
According to data from the American Council of Life Insurers (ACLI), the demand for permanent life insurance products has remained robust as tax professionals emphasize the importance of liquidity.
"The goal of a survivorship policy is not to provide income replacement for a surviving spouse, but to provide a pool of tax-free liquidity to satisfy the IRS," said Elena Rodriguez, a partner at a New York-based estate planning firm. "It prevents the forced liquidation of a family legacy that may have taken generations to build."
Cost-Effectiveness and Underwriting
From a financial planning perspective, survivorship policies are often more cost-effective than purchasing two separate individual life insurance policies. Because the insurance company only pays the benefit once, the premiums are generally lower.
Furthermore, underwriting for survivorship policies is often more lenient. Since the death benefit is tied to the survival of two people, the carrier's risk is lower. Even if one spouse has significant health issues, the policy can often be issued at a reasonable rate as long as the other spouse is in relatively good health.
"It is a mathematical play," Thompson said. "By insuring two lives, the actuarial probability of a payout is pushed further into the future, allowing the insurance company to charge a lower premium while the family secures a guaranteed dollar amount to cover their future tax bill."
Integration with Irrevocable Life Insurance Trusts (ILITs)
To maximize the effectiveness of survivorship policies, planners almost universally recommend holding the policy within an Irrevocable Life Insurance Trust (ILIT).
If an individual owns a life insurance policy personally, the death benefit is included in their taxable estate, potentially exacerbating the very tax problem they sought to solve. By placing the policy in an ILIT, the proceeds remain outside of the taxable estate. This allows the death benefit to be paid to the trust, which can then use the funds to purchase assets from the estate or provide a loan to the estate, providing the necessary cash to pay the IRS without increasing the tax burden.
"The ILIT is the structural cornerstone of this strategy," Rodriguez said. "Without it, you are effectively giving 40 cents of every insurance dollar back to the government. With it, you are providing a 100-cent-on-the-dollar solution to the liquidity crisis."
The 2026 "Sunset" Urgency
The 2026 sunset is not a hypothetical scenario but a statutory certainty under current law. While some political analysts suggest that a future Congress could extend the TCJA provisions, estate planners warn against a "wait and see" approach.
As the sunset date approaches, industry experts anticipate a "logjam" in the insurance market. "As we get closer to 2026, the demand for these policies will skyrocket, and the capacity for insurance companies to process applications will be stretched thin," Rodriguez noted. "Furthermore, the age and health of the clients are factors that only move in one direction. Locking in coverage now is a hedge against both tax changes and future uninsurability."
Recent statistics from the Tax Policy Center suggest that if the sunset occurs as scheduled, the number of taxable estates could triple. This would move the estate tax from a concern for the "ultra-wealthy" to a significant issue for the "moderately wealthy"—those with estates between $15 million and $25 million who may not currently view themselves as being at risk.
Business Succession Planning
For family-owned businesses, the role of survivorship insurance is particularly critical. Under Section 6166 of the Internal Revenue Code, some estates can defer tax payments, but the interest costs and stringent requirements can be burdensome.
"Many of our clients are farmers or manufacturing plant owners," Thompson said. "Their 'wealth' is in tractors, land, and machinery. You can't chop off 40% of a tractor and give it to the IRS. Survivorship insurance provides the 'cleanest' exit for the next generation to take over the business without the weight of a massive tax debt hanging over operations."
Conclusion
As the window closes on the current high-exemption environment, the move toward survivorship life insurance represents a defensive shift in American wealth management. By utilizing these policies, families are attempting to lock in the value of their estates and ensure that the transition of wealth to the next generation is not derailed by a sudden change in federal tax policy.
For now, the focus remains on Jan. 1, 2026. While the political landscape may shift, the actuarial and tax realities remain constant, making liquidity planning a top priority for those caught in the crosshairs of the impending exemption drop.
"The cost of the insurance is almost always less than the cost of the tax," Rodriguez said. "In the world of estate planning, certainty is the most valuable commodity, and survivorship policies provide exactly that."