When it comes to planning your estate, one of the more interesting insurance policies that can be used is second to die. If you don’t have any idea how second-to-die policy works and who should think about purchasing such a policy, then this article will guide you through.
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What is a Second to Die Life Insurance Policy?
Sometimes called joint survivorship life insurance, dual life or survivor insurance, this is a policy that usually covers two married people, although there are exceptions, and provides benefits to the heirs only after the second or surviving spouse passes away.
Sound hard? Let’s make it easy for you to understand…
When one member of the partnership passes away, there is no policy benefit to the second member or any other beneficiary. It is only when the second member of the partnership passes away does the life insurance kick in.
Unlike standard life insurance policies where the surviving spouse is usually the beneficiary, second-to-die life insurance is generally used for estate planning purposes.
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Who Needs A “Second to Die Policy”?
This type of dual life insurance is generally for couples who have built up a considerable estate but do not want to split it up among their benefactors until they both pass away. This is usually done to ensure that one spouse can still live on the estate if they want to even if their partner has passed on.
However, this type of insurance is mostly directed at the children so that they can pay estate taxes or perhaps support surviving children when both parents are gone. This type of insurance will actually postpone any estate taxes until the second spouse passes away and is designed to prevent any proceeds from death to be included in the gross estate of the insured.
Some Primary Reasons to Choose Such Policy:
There are several advantages of second-to-die life coverage, particularly when you take into account the effects of delaying any estate issues until after the second spouse has died. This is arguably the main advantage of the policy as standard life insurance may cover the death of one, but is too expensive for both.
Dynasty Trust Fund:
If it is expected that the child will not earn as much as their parents, then a dynasty trust in the form of a second to die life insurance policy can be established. The money from the trust will not activate until both parents are gone, but it can be used by the beneficiary to start up a business, buy a home, or any other expense the child deems necessary.
More explanation on dynasty trust:
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Special Needs Children:
If the couple has a special needs child or children, a second to die policy will help protect them in financial terms. A child would become a secondary beneficiary which activates when the second parent should pass away. Since the child cannot demand any benefits from the trust itself, the assets are not considered a part of the child’s financial earnings which means they still qualify for government benefits such as Medicaid.
Buy & Sell Agreements:
If a business is owned by a husband and wife team who plan to keep it running until they pass away, then any sale of the business would not take place until after the second spouse has died. A prospective buyer would enter a buy/sell agreement and it would be funded with the buyer taking out a second to die policy.
Parents can be torn by trying to split their assets between their children and their favorite charity. A second-to-die policy connected to a life insurance policy that cannot be revoked can solve that problem. In this manner, when the second parent passes away, the children will receive income and death proceeds that are tax-free from the trust itself and not the property that was given away to charity.
There are numerous other reasons why you would want an affordable second to die life insurance policy for your estate. From establishing an educational trust to spendthrift trusts and more, this type of policy does offer many benefits.
Generally speaking, this type of survivorship universal life insurance is really designed for couples who have considerable estate at least in the mid to upper six-figure range. Couples who have estates that are less are probably better off with standard life insurance plans and some estate planning that helps make the transition from one partner to the next.
How Much does it Cost?
Another factor is the second to die insurance cost which is actually lower than a traditional life insurance policy. Because the rates are based on both spouses passing away, this type of survivorship life insurance is not designed to build up cash value as quickly as normal life insurance. So, the rates can be 5% to 15% or more under what a standard life insurance policy will offer depending on a number of factors.
For those seeking out such policies, finding insurance quotes will help them narrow down the choices to those that provide the best benefits at the lowest prices. It will be very important to go over the policies and have the insurance agent explain how it works when the second spouse passes away. This will be most helpful when the children need to decide what to do about the estate left behind.
Is Second to Die Worth It?
Although there are several factors to consider, this type of dual life insurance is basically designed for couples who have substantial estates and children they would like to benefit from. Given the second-to-die policy rates, it would normally put it beyond what working class and lower-middle-class people would pay to protect their estate and provide for their children in case both parents should pass away.
However, for those in the upper-middle class and above, this type of policy makes good sense. This is especially true if there is a consideration of donating the assets to a charity while still wanting to provide for the children or if there is a special needs child that must have support for the rest of their life.
In any case, a second to die policy is one that most families should consider when standard life insurance does not provide enough to cover what they want.