Most life insurance policies insure only one person; a survivorship policy (also known as a second to die policy) insures two people, but only pays out the death benefit when the second insured dies.
This type of policy was developed for and used primarily in the estate arena. To the extent a married person leaves his/her estate to his/her spouse, no federal estate taxes are due (this also holds true for New Jersey’s Inheritance and Estate Tax, although I’m not sure if the same is true in all 50 states). The governing bodies assess an estate tax (provided the value of the estate exceeds the exemption threshold) when the second spouse dies and leaves the estate to anyone other than a charity.
Since there’s no tax due at the first death, there’s no need for liquidity to pay taxes at the first death. And a policy that insures two people but only pays a benefit when the second one dies requires a smaller outlay than a policy on each of them would. That is because the actuarial odds of both insureds dying before their respective life expectancies are less than one of them dying before life expectancy. Therefore, it would seem that this type of policy would be appropriate in these circumstances. And they generally are, but not always.
It is my opinion that survivorship policies are normally most appropriate when both insureds are close in age, and best when the female is a few years older. That is because the shorter the time frame between the two deaths, the more efficient the policy is; the longer the time between deaths, the more inefficient it is.
Survivorship policies come in all the flavors; whole life, universal life, guaranteed universal life, variable life, and I know of at least one company that offers a survivorship term life insurance company.
While the increase in the estate exemption provided by The American Taxpayer Relief Act of 2012 will decrease the need for this type of insurance, it won’t eliminate it. After all, New Jersey still levies a tax on estates over $675,000.