Second-To-Die Life Insurance Policies
Imagine a life insurance policy that doesn't pay off when you die. Second-to-die life insurance fits that description, and might be a worthwhile purchase for people who will leave behind estates worth $1 million or more.
A second-to-die life insurance policy, or survivorship life as it's sometimes called, insures two lives - usually a husband and wife. Unlike traditional life insurance, the death benefit isn't paid out until the second insured person dies.
Usually, the death benefit from a second-to-die life insurance policy is intended to pay taxes owed after both spouses pass away. The product was developed in the early 1980s in response to a law that postpones estate taxes until both spouses pass away.
Under federal tax law, there is a marital deduction permitting you to leave an unlimited amount of assets to your surviving spouse. If you leave all your worldly possessions to your husband or wife, no federal estate taxes are owed at the time of your death. Those assets then become part of the estate of the spouse and might be taxed when he or she dies. The death benefit from a life insurance policy could help pay those taxes.
There are also estate tax ramifications for small businesses, which is why business partners also purchase second-to-die policies.
Advantages to second-to-die life insurance policies
- Less expensive. Second-to-die life insurance is usually less expensive than traditional life insurance. The premium is based upon the joint life expectancy of the insureds. Since the insurance company owes nothing until both insureds die, the premium will be significantly cheaper.
- Easier to buy. It's easier to qualify for a second-to-die policy than for traditional life insurance. Since both insureds must die before the benefit is owed, the insurance company is less concerned that one of them might not be in good health. Companies are often willing to write the policy, even if one of the customers is uninsurable by traditional life insurance standards. Of course, each insurance company will have a different definition of "uninsurable."
- Builds your estate. In some cases, second-to-die life insurance is marketed as a way to build an estate, not just insulate it from taxes. Much like traditional life insurance, the death benefit of a second-to-die policy can ensure that certain people receive a minimum amount of money, even if you spend every dime during your lifetime.
- Preserves your estate. A second-to-die policy appeals to individuals who feel strongly about preserving their estates. They buy a second-to-die policy so their estate transfers intact to their heirs, with the life insurance paying the taxes.
- Pays your estate taxes. Federal estate taxes aren't the only concern when someone dies. The estate might owe income taxes on individual retirement accounts and tax-deferred plans held by the deceased. Unless the money is in a Roth IRA, the IRS hasn't taken its share yet and wants to be paid. In addition, your state may impose inheritance taxes. Many states do not have a marital deduction, so the surviving spouse might owe inheritance taxes at the time of his or her partner's death.
Not for small-fry estates
Second-to-die life might not make sense for people with small estates. It might not even make sense if you have a large estate, because with solid estate-planning advice there are other ways to avoid or reduce estate taxes.
Questions to ask before you buy
With any type of second-to-die life insurance, find out how the policy would be affected by a divorce or an unfavorable change in estate-tax laws. Some insurance companies offer a rider, without charge, that permits you to split up the policy in certain circumstances.
If you're considering a second-to-die life insurance, you might need an attorney who specializes in estate planning.