The first step is to evaluate your estate. If you're married with a joint estate of more than $2 million, or $1 million if you're single, you may be a prime candidate for these policies.

Think of survivorship life as a more complicated version of an individual life insurance policy. You can buy a whole life, universal life, or variable life policy (or a combination thereof), but so far term survivorship life is not on the market.

Basically, survivorship insurance is a joint life insurance policy that only pays the death benefit when the second person dies. It's complicated because you're dealing with two sets of actuarial tables and many other factors, all rolled into one policy. But the complexities may be worth it, because survivorship life insurance may be the cheapest way for you to solve an estate or business problem.

For example, a $1 million survivorship life policy is cheaper than a $1 million policy on one person or separate $500,000 policies on a couple. Even when one spouse is uninsurable, a survivorship life policy is still less expensive than an individual life policy on the healthy spouse. After all, there is always a chance the uninsurable spouse will outlive the healthy one.

Reasons for survivorship life insurance

The first survivorship life policy was developed in 1961, but the policies did not become popular until after the Economic Recovery Tax Act of 1981. Then it became possible to leave all of your assets to your spouse and to not pay taxes on those assets until your spouse died. Suddenly, there was a huge market in the estate planning area.

These are some of the reasons why you may want to consider survivorship life insurance:

• The proceeds can provide the liquid assets necessary to pay estate taxes, which can be especially useful if many of your assets are illiquid (such as real estate or a business you don't want to sell).

• The proceeds can also "replace" the taxes your estate had to pay so that your heirs receive an inheritance that hasn't been eroded by the Internal Revenue Service.

• It's perfect for two-earner couples. Usually, if one spouse dies, the other will make enough to keep the family going. But if both die, their children will be in big trouble. This is especially true if you have a child with lifetime special needs -- survivorship life insurance means that when neither of you is around to take care of him, there will be plenty of money available.

• You may want to leave a large amount to charity without reducing your children's inheritance. Survivorship life is perfect for the "estate tax bypass" technique, where you leave all of your assets to charity at death so you have no taxable estate. The net effect is that the IRS gets nothing.

• Finally, as more and more businesses develop buy-sell arrangements, survivorship life insurance also is helpful as an inexpensive way to fund these agreements by covering two executives. The business may have enough cash to redeem the stock upon one executive's death, but not both.

As estate planners come up with new ways to solve estate problems, there are many more ways to use this type of life insurance. However, it is still primarily used in the personal estate-planning arena.

Choosing a survivorship policy

How do you choose among different survivorship life policies? The first thing to do is to think of them as complicated individual life policies, and follow the same steps outlined in my previous columns on selecting life insurance.

Here more than ever, the annual premium in the life insurance illustrations is the least important factor in making a decision. Because you want to assume that a survivorship life policy will be in force for many years to come, you must make sure the assumptions used in the illustrations are reasonable. The expenses and mortality charges should be realistic and an investment return of 8% or less should be used. Each of these variables can change, and a small change in one can make a big difference in the policy's ultimate cost.

Most survivorship life illustrations use the "vanishing premium" concept, which assumes that eventually there will be enough cash value and annual dividends or interest to pay the premium. At some point in the future, you won't pay the premiums using out-of-pocket cash.

This is where you can really get into trouble if overly aggressive assumptions are made. It may take years longer than you expected before premiums stop. Even worse, you could go several years without having to pay a premium and then suddenly huge amounts are required to keep the policy in force (possibly after you've retired and your income is reduced). It never hurts to be too conservative in your assumptions.

When comparing illustrations, also beware of comparing level annual premium policies with "modified premiums," which have a lower annual premium for the first 10 or 15 years but then spike upward as much as 50% or more.

Two basic kinds of policies

There are two basic kinds of survivorship life policies:

1. The "actual status" policy, which basically rewrites the policy when the first insured person dies. The policy's cash values and dividends (and their future calculation) change.

2. The "Frazierized," which is named after an actuary who was a leader in the development of survivorship life. This policy is based on a joint life expectancy. In this version, there are no changes in cash values or dividends or future calculation after the first person's death.

If you're looking at both actual status and Frasierized illustrations, they will look very different using the same scenarios.

Make sure you purchase a policy from a company that conducts "in-force testing" every year on the policy. This means the insurance company keeps track of your policy as your company's situation changes, thus minimizing the chance that you will get an unpleasant surprise years from now.

Survivorship life insurance is a bargain when compared with individual policies. But you need a full estate plan to make sure the insurance is even necessary.