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Using Survivorship Policies to Fund Buy-Sell Agreements and Business Succession

Survivorship (second-to-die) life insurance is a powerful tool for high net worth (HNW) business owners who need liquidity for buy-sell agreements and orderly business succession. This article explains how survivorship policies work in the U.S., when they make sense for funding buyouts and estate settlement, pricing expectations (with examples), tax and trust considerations, and execution steps for business owners in California, New York, and Texas.

What is a Survivorship (Second-to-Die) Policy?

A survivorship policy insures two lives and pays a death benefit only after the second insured person dies. Commonly used in estate planning, it provides a large, tax‑free lump sum to the estate or designated beneficiaries to:

  • Pay federal and state estate taxes
  • Fund buy-sell agreements so surviving owners can acquire the deceased owners’ shares
  • Provide liquidity for estate settlement costs and business continuation

Key benefits:

  • Lower aggregate premium compared with two single-life permanent policies for the same combined death benefit.
  • Estate liquidity timed to the final death event (often the larger estate tax exposure).
  • Ideal for high face amounts required by HNW families and closely held businesses.

For background on how survivorship fits into broader estate planning, see Survivorship Life Insurance Explained: Funding Estate Taxes and Preserving Family Wealth.

Why Survivorship Policies for Buy-Sell Agreements?

Buy-sell agreements require reliable funding so surviving owners or the company can purchase the deceased owner’s interest quickly and at a pre-set price. Survivorship policies are attractive when:

  • The company owners are family members or spouses (common in closely held firms).
  • The estate will likely face significant estate tax liability upon the second death.
  • Owners want a single, large death benefit to settle ownership transfers after the last owner dies.

Benefits specific to buy-sell funding:

  • Predictable cash on hand to avoid forced sales of business assets.
  • Estate neutrality — prevents surviving owners from having to liquidate or dilute the business.
  • Cost efficiency when the objective is funding a late-life liquidity need.

Compare with alternatives (single-life policies, lines of credit, sinking funds) in Second-to-Die vs Single-Life Policies: Cost, Purpose, and Estate Planning Tradeoffs.

How Funding Mechanics Work (Typical Structures)

Common structures used in conjunction with survivorship policies:

  • Company-owned policy: The business owns the survivorship policy and is the beneficiary; proceeds are used to fund a cross-purchase or redemption following the buy-sell triggering event.
  • Cross-purchase funded by owners: Owners own the policy in a trust or individually—proceeds are paid to surviving owners.
  • Irrevocable Life Insurance Trust (ILIT): An ILIT owns the policy to keep proceeds out of the insured’s estate and provide estate-tax-free liquidity to beneficiaries. See how ILITs pair with survivorship policies: How Survivorship Policies Work with ILITs and Trust Structures for HNW Estates.

Key steps in a standard company-owned/ILIT-backed buy-sell funding:

  1. Draft or amend the buy-sell agreement to reference the survivorship funding mechanism.
  2. Establish an ILIT or determine the appropriate owner/beneficiary structure.
  3. Underwrite and place the survivorship policy (permanent SUL or survivorship whole life).
  4. Coordinate Premium funding (company pays vs owners fund premiums).
  5. Define claims payout procedures and update corporate documents.

Tax & Estate Considerations (U.S. Focus, 2024–2025 context)

Using an ILIT to own the survivorship policy generally keeps the death proceeds out of the insured’s taxable estate — critical for estates near or above federal/state thresholds. Be cautious of the three-year rule: if the insured transfers an existing policy into an ILIT within three years of death, proceeds may be includable in the estate.

For gift and GST planning when funding an ILIT, consult estate counsel and tax advisors.

Pricing Examples and Carrier Comparisons

Pricing varies widely by insurer, product type (survivorship universal life (SUL) vs survivorship whole life), underwriting class, ages, and face amount. Below are illustrative ranges for HNW use cases (2024 market ranges; get firm quotes from carriers or brokers).

Scenario (Couple ages) Face Amount Typical Annual Premium Range Typical Product Types Use Case
Ages 60 & 62 $5,000,000 $8,000 – $20,000 SUL / Survivorship Universal Life Buy-sell for small-medium business
Ages 65 & 66 $10,000,000 $20,000 – $45,000 SUL / Survivorship Whole Life Estate tax liquidity for HNW estate
Ages 55 & 58 $3,000,000 $4,000 – $12,000 Term S-to-D (shorter-term) / SUL Short-term buyout funding, lower cost option

Representative carriers frequently used by advisors for survivorship products:

  • MassMutual — known for participating whole life, durable SUL solutions.
  • Lincoln Financial Group — strong SUL and survivorship UL products with robust illustrations.
  • Prudential — broad product suite and established underwriting.
  • AIG (Valic/United States Life) — large SUL offerings for large face amounts.
  • Transamerica — competitive SUL pricing for estate planning.

Typical pricing notes:

  • Insurers like Lincoln, Prudential, and MassMutual commonly require initial single premiums or rolling premiums funded by the company or trust. For example, a $10M SUL for a 65/66 couple often requires annualized premiums in the tens of thousands or a single-pay funding in the low hundreds of thousands for guaranteed funded designs.
  • For term survivorship or shorter-term guarantees, carriers such as Banner Life (Legal & General America) and Prudential may offer lower-cost solutions, but these expire and may not be appropriate if lifetime coverage is needed.

For consumer-focused pricing context and product comparisons, broker resources such as Policygenius provide ballpark industry cost information: https://www.policygenius.com/life-insurance/survivorship-life-insurance/.

Always obtain firm, current quotes because pricing and underwriting classes change.

Regional Considerations: California, New York, Texas

  • California (Los Angeles, San Francisco): No state estate tax — survivorship policies often used primarily to fund federal estate tax exposure and ensure business continuity without state-level estate tax layering.
  • New York (New York City, upstate): State estate tax can be a significant factor. Survivorship policies often integrate with state tax planning and NY-specific withholding/filing requirements.
  • Texas (Dallas, Houston): No state estate tax, but survivorship policies remain valuable for buy-sell liquidity and to avoid forced asset sales.

Local counsel and insurance advisors in each state are advised to align policy ownership structures with state law and corporate governance practices.

Risks, Limitations, and Alternatives

  • Survivorship policies pay only after the second death — not useful where immediate single-owner death liquidity is required.
  • Premiums for permanent SUL/whole life can be substantial; funding needs may impact business cash flow.
  • If the policy is owned by the insured or transferred to an ILIT within three years of death, proceeds may be includable in the estate.
  • Alternatives/augmentations:

When flexibility is essential, review When Survivorship Policies Undermine Flexibility: Alternatives and Layered Approaches.

Implementation Checklist for Buy-Sell Funding with Survivorship Insurance

  • Confirm buy-sell valuation method and price triggering events.
  • Determine owner and beneficiary of the policy (company-owned vs ILIT).
  • Select appropriate product (SUL vs survivorship whole life vs term-to-100).
  • Obtain multiple carrier quotes (Lincoln, Prudential, MassMutual, AIG, Transamerica).
  • Coordinate with tax counsel for estate/gift implications and ILIT drafting.
  • Update corporate documents and shareholders’ agreements to reflect funding.
  • Review annually and at major life events (retirement, buyouts, changes in value).

Conclusion

For HNW business owners in California, New York, Texas, and across the U.S., survivorship (second-to-die) policies provide cost-effective, predictable liquidity for buy-sell agreements and business succession — especially when estate-tax exposure is concentrated at the second death. Work with experienced life insurance brokers, estate attorneys, and tax advisors to model scenarios, obtain carrier quotes, and implement trust structures (ILITs) to preserve estate value and ensure a smooth ownership transition.

Further reading on implementation and modeling: Designing Survivorship Policies for Large Estates: Coverage Amounts and Premium Strategies and Liquidity Planning with Second-to-Die Coverage: Timing, Payouts, and Estate Settlement.

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