Is It a Good Idea to Buy a Second-to-Die Policy?

Second-to-die insurance or survivorship policy is a specific life insurance policy that insures two people. In this plan, the beneficiaries receive the survivor benefit only after the last insured person dies.

This policy is different from a regular life insurance policy, as here, the surviving partner does not receive any benefits after the spouse dies. In standard life insurance policies, spouses name their husbands or wives a beneficiary, and he/she gets the survivor benefit once the policyholder dies.

Many people take second-to-die insurance for estate planning, mainly to fund an irreversible life insurance trust (ILIT) or to pass on survivor benefits to children or grandchildren. A reputable insurance broker can walk you through this policy for better understanding.

More Insights into the Second-to-Die Policy

The purpose of taking a second-to-die policy is to help beneficiaries pay off estate taxes. The most common transfer tax in the US is the Federal Estate Tax. Besides, different other transfer taxes are also there at various state levels.

Survivorship policies provide the required liquidity to survivors to pay the outstanding taxes without having to sell other assets.

Example:

Let us assume that Daniel and Emma own a property or estate in California for which the projected estate tax is $4 million. Although they have enough assets to pay the tax amount, most of these are business assets and properties.

If they have a second-to-die policy, after Daniel passes away, all the assets can transfer to Emma because she is the only owner now, and there are no outstanding taxes at this point (or vice versa). However, when Emma dies, too, her estate has to file with the Internal Revenue Service (Form 706)to complete the obligation of paying all the outstanding estate taxes within the next 9 months of Emma’s death.

Generally, relatively larger estates have complexity when it comes to tax obligations. So, in normal circumstances, it is unlikely that Emma’s estate executor could sell off the relevant assets to pay the due tax before 9 months’ window completes. On some occasions, the estate may request an extension. 

Now, if Daniel and Emma have second-to-die insurance, both of them can get coverage, and after their passing, their survivors will be able to pay the estate taxes with the death benefit.

Second-to-Die Policies are Inexpensive Compared to Regular Life Insurance

Yes, second-to-die policies cost much lesser than traditional life insurance policies due to their much lower premiums. It is because these policies cost significantly lower to the insurance company.

It is simple mathematics. It is more likely for traditional insurance policies that the primary policyholder may die, and the beneficiary will get the survivor benefit. However, in second-to-die policies, the probability of both insured individuals’ passing during a given year is much lower, and thus they cost lesser to the insurance company. Check with an insurance broker to learn about all these aspects.

An example will clarify the difference between the pricing of a second-to-die policy and a traditional life insurance policy.

Again, if we assume Daniel and Emma both age 45, and the death benefit of their policy is $1 million, the breakdown of their premiums are below:

• The annual premium for Daniel will be $16,730.
• The annual premium for Emma will be $14,820.
• The annual premium for the second-to-die policy will be $11,129.

In any circumstances, no one knows who will die first. This is why a survivorship life insurance like a second-to-die policy covers the survivorship benefit for children and grandchildren in terms of estate taxes.

Is a Second-to-Die Policy Good for Long-term Cash Accumulation?

A second-to-die policy may appear to be an attractive option for you to create a cash accumulation strategy as part of your retirement plan. However, that may not work out well.

When it comes to using it as a cash accumulation vehicle, a survivorship life insurance like a second-to-die policy does not shine compared with an alternative individually insured plan. The individual life insurance policies tend to work out much better for accumulating cash value. Besides, traditional life insurance plans provide additional financial security that second-to-die policies cannot. An insurance broker can surely guide you on this.

Before We Go

We have been in the insurance industry since 1954, and we have seen many people who consult us about buying life insurance mainly for their cash accumulation features. However, we find that more often than not, death benefit becomes a little more critical when choosing the right policy. We guide them to select an approach that is perfect for them and their beneficiaries.

As a reputable and leading insurance broker in California, our priority is to serve you, keeping your financial interest and security in mind. Remember that we represent dozens of insurance companies, not just one company. We will give you all the options and details to get a policy that suits you the best. You can get a free life insurance quote by filling out this online form. You can also give us a call at our toll-free number 1-888-505-7988. We would always be happy to help you!