What Is Second To Die Life Insurance And How Does It Benefit Families?

 

Life insurance is a vital financial tool that can provide peace of mind and security for your loved ones after you pass away. But did you know that there is a type of life insurance that covers two people instead of one? It’s called second to die life insurance, and it can offer some unique advantages for families who want to plan their estate and protect their legacy.

Second to die life insurance, also known as survivorship or last survivor life insurance, is a joint permanent life insurance policy that pays out a death benefit only when both insureds have died. Unlike regular life insurance, where the surviving spouse or partner receives the benefits after the first insured dies, second to die life insurance defers the payout until both insureds are gone.

The main purpose and benefit of second to die life insurance is to help families with estate planning, tax savings, and legacy protection. By delaying the death benefit until both spouses or partners pass away, second to die life insurance can help cover the estate taxes and other costs that may arise when transferring assets to the heirs. It can also help preserve or enhance the value of specific assets or properties that the family wants to keep in the bloodline or donate to charity.

Second to die life insurance policies come in different types and variations, depending on your needs and preferences. You can choose between whole life, universal life, or term life policies, each with its own features and benefits. You can also customize your policy with riders, such as an accelerated death benefit rider, a waiver of premium rider, or a disability income rider.

Choosing the best second to die life insurance policy for your situation can be challenging, especially if you are not familiar with the ins and outs of estate planning and life insurance. That’s why it’s important to do your research, compare quotes, and consult with a professional financial planner or estate attorney before making a decision.

In this article, we will explain how second to die life insurance works, who should consider it, how to use it for estate planning, and what are some of the alternatives and drawbacks of this type of policy. By the end of this article, you will have a better understanding of whether second to die life insurance is right for you and your family.

How Second To Die Life Insurance Works

Second to die life insurance is a type of joint permanent life insurance policy that covers two people (usually a married couple or business partners) under one policy. It pays out a death benefit only when both insureds have died.

The basic features and mechanics of second to die life insurance are similar to those of other permanent life insurance policies. You pay a premium (either fixed or flexible) to keep the policy in force. The policy may have a cash value component that grows tax-deferred over time and can be accessed through loans or withdrawals while you are alive. The policy pays out a death benefit (either level or increasing) to your beneficiaries (usually your children or grandchildren) after both insureds have died.

However, there are some key differences between second to die life insurance and other types of life insurance policies. Here are some of them:

• Second to die life insurance is typically cheaper than buying two individual policies for each spouse or partner. This is because the insurer only has to pay out once instead of twice, and because the joint life expectancy of two people is longer than that of one person.
• Second to die life insurance does not provide any benefits to the surviving spouse or partner after the first insured dies. This means that if one spouse or partner dies before the other, the survivor will not receive any money from the policy and will have to continue paying the premiums until they pass away as well.
• Second to die life insurance is usually easier to qualify for than individual policies for each spouse or partner. This is because the insurer considers the health and risk factors of both insureds together instead of separately. This means that if one spouse or partner has a pre-existing condition or a high-risk occupation, they may still be able to get coverage as long as the other spouse or partner is healthy and low-risk.

Second to die life insurance can be advantageous or disadvantageous for couples or business partners depending on their situation and goals. Here are some examples of scenarios where second to die life insurance would be beneficial or detrimental:

• Second to die life insurance would be beneficial for couples who have a large estate that would be subject to estate taxes and other costs when they pass away. By using second to die life insurance to fund an irrevocable life insurance trust (ILIT), they can avoid or reduce the estate taxes and ensure that their heirs receive the full value of their assets.
• Second to die life insurance would be beneficial for couples who have children or grandchildren with special needs or disabilities. By using second to die life insurance to fund a special needs trust, they can provide for the long-term care and support of their dependents without jeopardizing their eligibility for government benefits.
• Second to die life insurance would be beneficial for couples who want to leave a large donation to a charity or a cause that they care about. By using second to die life insurance to fund a charitable remainder trust (CRT), they can generate income for themselves while they are alive and leave a tax-free legacy to their chosen charity after they pass away.
• Second to die life insurance would be detrimental for couples who need income or financial support from each other after one of them dies. Since second to die life insurance does not pay out until both insureds are gone, the surviving spouse or partner will not receive any money from the policy and may face financial hardship or reduced living standards.
• Second to die life insurance would be detrimental for couples who have different beneficiaries or estate plans from each other. Since second to die life insurance pays out to one set of beneficiaries after both insureds are gone, it may create conflicts or disputes among the heirs if they have different expectations or interests in the estate.
• Second to die life insurance would be detrimental for couples who divorce or separate after buying the policy. Since second to die life insurance is a joint policy that cannot be split or transferred, the ex-spouses or partners will have to continue paying the premiums until they both die or surrender the policy and lose the coverage and the cash value.

Who Should Consider Second To Die Life Insurance

Second to die life insurance is not for everyone, but it can be a useful strategy for many different types of families, not just the wealthy. The target market and ideal candidates for second to die life insurance are those who have a significant estate that they want to pass on to their heirs with minimal taxes and costs, or those who have specific assets or properties that they want to preserve or enhance for their family or charity.

Some of the factors and criteria that affect the eligibility, cost, and coverage of second to die life insurance are:

• Age: The younger you are when you buy the policy, the lower your premiums will be. However, you also have to consider how long you expect to live and how long you want the coverage to last. If you buy the policy too early, you may end up paying more in premiums than you will receive in death benefits. If you buy the policy too late, you may not qualify for coverage or pay higher premiums due to your age and health.
• Health: The healthier you are when you buy the policy, the lower your premiums will be. However, you also have to consider how your health may change over time and how that will affect your coverage and premiums. If you develop a chronic illness or a terminal condition, you may not be able to renew your policy or increase your coverage. If you improve your health or lifestyle, you may be able to lower your premiums or get a refund of some of your premiums.
• Marital status: The marital status of the insureds affects the eligibility and cost of second to die life insurance. Generally, married couples get better rates and terms than unmarried couples or business partners. However, there are exceptions and variations depending on the insurer and the state laws. For example, some insurers may offer coverage for domestic partners, civil unions, or common-law marriages. Some states may recognize same-sex marriages, while others may not.
• Estate size: The size of your estate affects the need and benefit of second to die life insurance. Generally, the larger your estate, the more likely you are to face estate taxes and other costs when you pass away. However, there are exemptions and thresholds that vary depending on the federal and state laws. For example, in 2021, the federal estate tax exemption is $11.7 million per person or $23.4 million per couple. This means that if your estate is worth less than that amount, you will not owe any federal estate taxes. However, some states may have lower exemptions or impose additional inheritance taxes on your heirs.
• Tax bracket: The tax bracket of your heirs affects the benefit of second to die life insurance. Generally, the higher your heirs’ tax bracket, the more they will benefit from receiving a tax-free death benefit from your policy. However, there are other factors that may affect their tax liability, such as their income sources, deductions, credits, and exemptions. For example, if your heirs receive income from qualified retirement accounts such as IRAs or 401(k)s, they may have to pay income taxes on those distributions, which may reduce their net inheritance. On the other hand, if your heirs receive income from tax-free sources such as Roth IRAs or municipal bonds, they may have a lower tax burden and a higher net inheritance.
• Financial goals: The financial goals of you and your heirs affect the suitability and benefit of second to die life insurance. Generally, the more you want to leave behind for your heirs or charity, the more you will benefit from second to die life insurance. However, you also have to consider your own financial needs and priorities while you are alive, such as your retirement income, health care expenses, lifestyle expenses, and debt obligations. You don’t want to buy a policy that is too expensive or too large for your budget or your estate.

If you think that second to die life insurance might be a good option for you and your family, you should shop around, compare quotes, and find a reputable insurer that offers the best coverage and rates for your situation. You can use online tools and calculators to estimate your premiums and death benefits based on your age, health, estate size, and policy type. You can also contact different insurers and agents to get personalized quotes and recommendations.

However, before you buy a second to die life insurance policy, you should also consult with a professional financial planner or estate attorney who can help you evaluate your needs and goals, review your existing estate plan and life insurance policies, and advise you on the best course of action. They can also help you set up an irrevocable life insurance trust (ILIT) or other legal structures to maximize the tax benefits and control over your policy and your estate.

How To Use Second To Die Life Insurance For Estate Planning

One of the main reasons why people buy second to die life insurance is to use it for estate planning purposes. Estate planning is the process of arranging your affairs and assets in a way that ensures that they are distributed according to your wishes and in the best interest of your heirs after you pass away.

Estate planning can be challenging and complex, especially if you have a large or complicated estate that involves multiple assets, properties, businesses, beneficiaries, or jurisdictions. Without proper estate planning, you may face various challenges and issues that can diminish the value of your estate or create conflicts among your heirs. Some of these challenges and issues are:

• Estate taxes: Estate taxes are taxes imposed by the federal and state governments on the transfer of assets from a deceased person to their heirs. Estate taxes can be very high depending on the size of your estate and the tax laws in effect at the time of your death. For example, in 2021, the federal estate tax rate ranges from 18% to 40%, depending on the amount of taxable estate above the exemption threshold of $11.7 million per person or $23.4 million per couple. Some states may also impose additional inheritance taxes on your heirs based on their relationship to you or their residency status.
• Probate costs: Probate is the legal process of validating your will (if you have one) and settling your estate after you pass away. Probate can be time-consuming, expensive, and public depending on the complexity of your estate and the laws in your state. Probate costs may include court fees, attorney fees, executor fees, appraisal fees, accounting fees, bond fees, and other expenses. Probate costs can eat up a significant portion of your estate value and reduce the amount that goes to your heirs.
• Liquidity problems: Liquidity problems occur when you don’t have enough cash or easily convertible assets in your estate to pay for the estate taxes, probate costs, debts, or other obligations that arise after you pass away. Liquidity problems can force your heirs to sell some of your assets or properties at a loss or under unfavorable terms to raise cash quickly. This can result in losing some of your valuable assets or properties that you wanted to keep in the family or donate to charity.
• Asset protection: Asset protection is the process of shielding your assets or properties from creditors, type of policy that may not suit everyone’s situation and preferences. Suitability risk can be reduced by consulting with a professional financial planner or estate attorney who can help you evaluate your needs and goals, review your existing estate plan and life insurance policies, and advise you on the best course of action. lawsuits, divorces, or other threats that may jeopardize their value or ownership. Asset protection can be important if you have a high-risk occupation or business, a large amount of debt, or a contentious family situation. Without proper asset protection, you may lose some of your assets or properties to creditors or claimants who may have a legal right or interest in them.

Second to die life insurance can help you solve or mitigate some of these challenges and issues by providing a large, tax-free death benefit to your heirs after both you and your spouse or partner pass away. The death benefit can be used to:

• Offset estate taxes and other costs: The death benefit can be used to pay for the estate taxes, probate costs, debts, or other obligations that arise after you pass away. This can help preserve the value of your estate and ensure that your heirs receive the full amount that you intended to leave them.
• Fund an irrevocable life insurance trust (ILIT) or a generation-skipping trust (GST): An ILIT is a type of trust that owns and controls your second to die life insurance policy. By transferring your policy to an ILIT, you can remove it from your taxable estate and reduce your estate taxes. You can also designate the ILIT as the beneficiary of your policy and specify how the death benefit will be distributed to your heirs. A GST is a type of trust that skips a generation of beneficiaries (usually your children) and passes the assets directly to your grandchildren or later generations. By using a GST, you can avoid paying estate taxes twice on the same assets and protect them from creditors or divorces of your children.
• Preserve or enhance the value of specific assets or properties: The death benefit can be used to preserve or enhance the value of specific assets or properties that you want to keep in the family or donate to charity. For example, if you have a family business, a vacation home, or a collection of art or jewelry, you can use the death benefit to pay off any mortgages, loans, taxes, or maintenance costs associated with them. You can also use the death benefit to buy out any co-owners or partners who may have an interest in them. This can help you maintain or increase the value of these assets or properties and prevent them from being sold or divided.

Alternatives And Drawbacks Of Second To Die Life Insurance

Second to die life insurance can be a powerful and beneficial tool for estate planning and legacy protection, but it is not without its drawbacks and limitations. Before you buy a second to die life insurance policy, you should also be aware of some of the potential disadvantages and alternatives of this type of policy. Here are some of them:

• Lack of flexibility: Second to die life insurance is a joint policy that cannot be split or transferred after it is issued. This means that if you change your mind, divorce, separate, or remarry after buying the policy, you will not be able to modify or cancel the policy without losing the coverage and the cash value. You will also not be able to change the beneficiaries or the death benefit amount without the consent of both insureds.
• Survivorship risk: Survivorship risk is the risk that one spouse or partner will outlive the other by a long time and have to pay the premiums alone for many years before receiving any benefits from the policy. This can create financial hardship or reduced living standards for the survivor, especially if they depend on the income or support of the deceased spouse or partner. Survivorship risk can be mitigated by choosing a policy with a survivorship benefit rider, which pays out a portion of the death benefit to the survivor after the first insured dies.
• Policy lapse risk: Policy lapse risk is the risk that the policy will terminate before paying out any benefits due to non-payment of premiums, surrender, withdrawal, loan default, or other reasons. Policy lapse risk can be increased by choosing a policy with flexible premiums, such as universal life insurance, which allows you to adjust your premiums according to your cash flow and cash value. However, if you pay too little or skip payments, you may deplete your cash value and cause your policy to lapse. Policy lapse risk can be reduced by choosing a policy with guaranteed premiums, such as whole life insurance, which requires you to pay a fixed amount every year to keep your policy in force.
• Opportunity cost: Opportunity cost is the cost of choosing one option over another option that may have a higher return or benefit. Opportunity cost can be high for second to die life insurance because it requires you to pay premiums for many years before receiving any benefits from the policy. This means that you are giving up the opportunity to invest that money elsewhere and earn a higher return or income. Opportunity cost can be lowered by choosing a policy with a high cash value growth rate, such as universal life insurance with an indexed or variable account, which allows you to participate in the performance of an index or a portfolio of investments.
• Suitability risk: Suitability risk is the risk that the policy is not appropriate or adequate for your needs and goals. Suitability risk can be high for second to die life insurance because it is a complex and specialized type of policy that may not suit everyone’s situation and preferences. Suitability risk can be reduced by consulting with a professional financial planner or estate attorney who can help you evaluate your needs and goals, review your existing estate plan and life insurance policies, and advise you on the best course of action.

Second to die life insurance is not the only option for estate planning and legacy protection. There are other tools and strategies that you can use to achieve similar or different objectives, such as:

• Wills: A will is a legal document that specifies how you want your assets and properties to be distributed after you pass away. A will can help you avoid intestacy laws, which are the default rules that govern how your estate is divided if you die without a will. A will can also help you name an executor, who is the person who will manage your estate and carry out your wishes, and a guardian, who is the person who will take care of your minor children if you die.
• Trusts: A trust is a legal arrangement that allows you to transfer your assets and properties to a trustee, who is a person or an entity that will hold and manage them for the benefit of one or more beneficiaries, who are the people or entities that will receive them according to your instructions. A trust can help you avoid probate, reduce taxes, protect assets, control distribution, and provide for special needs. There are many types of trusts, such as revocable trusts, irrevocable trusts, living trusts, testamentary trusts, charitable trusts, special needs trusts, etc.
• Gifting: Gifting is the act of transferring your assets or properties to another person or entity without receiving anything in return. Gifting can help you reduce your taxable estate, avoid gift taxes, provide income or support to your loved ones or charity, and enjoy seeing them use or appreciate your gifts while you are alive. However, gifting also has some drawbacks, such as losing control or ownership of your assets or properties, triggering income taxes for the recipient, or affecting their eligibility for government benefits.
• Annuities: An annuity is a contract between you and an insurance company that guarantees you a stream of income for a certain period of time or for life in exchange for a lump sum payment or a series of payments. An annuity can help you secure your retirement income, hedge against inflation, defer taxes, and provide a death benefit to your heirs. However, annuities also have some drawbacks, such as high fees, surrender charges, low returns, limited liquidity, and complex terms.
• Charitable giving: Charitable giving is the act of donating your assets or properties to a charity or a cause that you care about. Charitable giving can help you support a worthy cause, reduce your taxable income or estate, receive tax deductions or credits, and create a lasting legacy. However, charitable giving also has some drawbacks, such as losing control or ownership of your assets or properties, choosing the right charity or cause, complying with tax rules and regulations, and coordinating with other estate planning tools or strategies.

Conclusion

Second to die life insurance is a type of joint permanent life insurance policy that pays out a death benefit only when both insureds have died. It can offer some unique advantages for families who want to plan their estate and protect their legacy.

By using second to die life insurance for estate planning purposes, you can:

• Cover the estate taxes and other costs that may arise when transferring assets to your heirs
• Fund an irrevocable life insurance trust (ILIT) or a generation-skipping trust (GST) to maximize the tax benefits and control over the death benefit distribution
• Preserve or enhance the value of specific assets or properties that you want to keep in the family or donate to charity

However, second to die life insurance also has some drawbacks and limitations that you should be aware of before buying it. Some of these are:

• Lack of flexibility
• Survivorship risk
• Policy lapse risk
• Opportunity cost
• Suitability risk