What is a Second to Die Life Insurance Policy?
We often think of life insurance as a solo experience, the smart choice for the head of a household, or the main family financial supporter. But life insurance is much more multi-dimensional than that and can be used for specific business reasons or as part of estate planning. That is the case of Second to Die Life Insurance Policy also known as Survivorship Whole Life Insurance, designed to insure two people under one policy with one premium payment.
What are the Advantages and Who Needs It?
The policy pays out a death benefit only when the second of the two insured people or co-policyholders dies. When the first of the co-policy owners passes away, the benefit rolls over to the second insured person’s beneficiaries. The most common purchasers of this type of survivorship policy are married couples. They have what insurance companies call “Insurable Interest,” which is defined as someone who has a proven relationship with the insured person and who would suffer a financial loss if that person died. That is why spouses are most likely to choose second to die life insurance policy because of common need, as well as lower cost. Since the insurance carrier’s cost of the death benefit is based upon the joint life expectancy of both spouses, the theory is that the premium would be significantly lower than the price of buying two individual policies. You’ll be the judge of that by comparing the cost-benefit of a joint survivorship policy versus buying individual life insurance policies, which might not be a deal breaker if you and your spouse are relatively young and in excellent health.
Some married couples make the choice of the second to die life insurance because it could be a good economic saving if there is a wide age difference or poor health among one of the spouses. A younger, healthier spouse can skew the “joint” rate classification the couple gets from the insurance carrier in a positive way. In other words, the unhealthy person will get lumped in with the healthier co-insured spouse and qualify for a better and cheaper premium rate class. The unhealthy person would likely be placed into a more expensive highly rated risk class if he/she bought an individual policy, and might even be denied coverage on their own.
Two Types of Joint Life Policies
You can purchase two different types of joint life policies:
- First-to-die life insurance
- Second-to-die life insurance
First-To-Die Life Insurance
A first-to-die life insurance policy pays the death benefit proceeds upon the death of the first insured policyholder. One typical use of this type of policy is among business partners or professionals such as physician groups. The cash could be used for business continuation funds to allow a surviving partner to buy out the deceased partner’s business interest and pay for possible expenses sparked by that key partner’s death. Limited Liability Partnerships (LLP) and Limited Liability Company (LLC) are both business structures that might benefit from this type of life insurance coverage. In these legal entities, a partnership gets liability protection and tax benefits. An LLP is often the most common type of entity formed by professional, medical, and legal groups. In the LLP structure, there must be a managing partner that is liable for the actions of the partnership. The joint policy could cover that managerial partner. Married couples may also cash in on this type of joint life insurance to provide the surviving spouse funds for living expenses. Though this might sound like a traditional, individual term life insurance policy, the difference is that both spouses are covered under the umbrella of one policy and could pay lower premium costs.
Second-To-Die Life Insurance
The intent of this type of joint policy is exactly how it sounds. The death benefit is not paid out until the second insured person passes away. Advisors might guide a high-income couple toward this type of policy as a hedge against estate taxes for their heirs. Life insurance enjoys a special tax status and the death benefit is both income tax-free and completely separate from the couple’s estate, therefore not subject to estate or income tax. One important caveat is that the policy cannot be owned by the insured in order to qualify for this estate tax-free status. There are no estate taxes incurred by the inheriting spouse. One possible use of a survivorship second-to-die policy might be for a family-owned business to provide funds to cover taxes and other cash needs.
Advantages of Second to Die Life Insurance
Some of the advantages of survivorship life insurance are cost, and as a useful tool in estate planning. The latter can be used by married couples, as well as by privately held businesses to offset estate taxes. Quite simply, it is a tool financial advisors might recommend to upper middle class, and more affluent clients to cash in on the tax benefits. As aforementioned, a typical client profile can be private physicians groups, partners of a law firm, and other business owner/partners.
One disadvantage of second-to-die protection is applying it to a couple that does not have an equitable economic situation. For instance, if the surviving policyholder were a stay-at-home spouse without an independent source of assets, that person would need funds to maintain living and business expenses upon the death of the main breadwinner. In this situation, the couple is probably better off having a first-to-die survivorship policy to benefit the spouse without income. Although a second-to die-whole life policy “rider” provides a surviving partner the availability of borrowing on the cash value of the policy, the loan balance is deducted from the death benefit, lowering the cash proceeds that the heirs will someday receive and possibly need to cover estate taxes. It’s complicated, that’s why we strongly suggest you consult your tax professional and money manager about these structures.
Term vs Whole Life Insurance
Survivorship riders come in two flavors – term or whole life insurance. We mentioned how whole life policies provide permanent coverage for the life of the insured person, and act almost as a saving account in building up cash value with the right investment circumstances. However, keep in mind that permanent insurance policies cost significantly more than term life insurance—perhaps up to 10 times more so it may not be a good investment, or even affordable for some. On the other hand, term life insurance only lasts for a fixed period of time, 5-30 years, and costs will peak at the end of the coverage term, forcing you to either convert that policy for a much higher rate, or buy a new term policy (at the current age and health status) without any cash value or investment component to bank on.
Survivorship Policy Ownership
If structured properly, survivorship whole life policies can avoid estate taxes altogether. Like we said before, because life insurance enjoys special tax privileges, with survivorship policies, the death benefit also passes income tax-free to the named heirs/beneficiaries. You should seek the advice of an estate tax attorney to set it up properly. One of the ways you should ask about is putting it in a trust— perhaps irrevocable life insurance trust (ILIT).
Possible Reasons to Buy a Second to Die Life Insurance Policy
• Provide cash to your estate executor/trustee to avoid selling off assets to pay estate taxes upon the death of the policyholders.
• Equal the inheritance playing field among heirs. If upon the death of both policyholders (Second-to-die) you leave a business or property to one adult child, you can use the insurance proceeds of the policy to distribute the death benefit cash to any other children.
Survivorship Policies With Optional Riders
Insurance carriers offer rider options with survivorship policies that tack on additional benefits to your coverage. Here is one of the more popular and valuable ones offered for an additional cost:
• A long-term care rider, or “accelerated death benefit” that gives policyholders access to the cash from the death benefit while they are still alive if they have been diagnosed with a terminal illness. This benefit could have tax implications so research it with your tax advisor.
Survivorship Whole Life Policies Are Not Always Enough
The bottom line is that survivorship policies might indeed be an effective estate-planning tool, but might not be enough for all couples who feel they need to add individual coverage for the second-to-die or surviving policyholder. That is common among couples that will need that additional liquidity after the death of the first spouse, such as in the case of an insured couple with a big age gap.
Design a Smart Life Insurance Plan
You should have a clearer picture now that choosing these specialized life insurance policies requires research and planning with your tax professional. Survivorship whole life insurance can be part of a smart, tax-advantaged financial plan that ensures the continuation of a family or business, but you must do your homework to see if it’s right for your circumstances. Once you do that you can tap into the experience of one of our unbiased, licensed agents to look at the policy options from different insurance carriers. Not all offer second to die life insurance policies and there could be big price swings among those who do. Start with a free, no obligation quote by filling out a short form, or Speak to a Live Agent to discuss your needs.
Thank you for reading our article, “Second to Die Life Insurance Policy – Also called Survivorship Whole Life Insurance”. If you have any questions, please leave a comment below.