Second-to-Die Insurance, also referred to as survivorship life insurance, presents a unique way of life insurance planning that extends beyond the survival of one policyholder. It is essentially a life insurance policy taken out on two individuals, typically married partners, where the death benefit payout to the beneficiaries only occurs after the demise of the last surviving policyholder. By design, this type of insurance provides substantial advantages for high-net-worth individuals and couples seeking estate planning solutions, or for those who wish to pass on a considerable inheritance to their progeny.
Conventional life insurance policies differ significantly from Second-to-Die insurance. In the standard arrangement, the policyholder typically names their spouse as the beneficiary, who in turn receives the death benefit upon the policyholder's death. However, in the case of Second-to-Die insurance, no benefits are paid out until the death of the second policyholder. Thus, this arrangement's primary beneficiaries are often children or grandchildren who receive the benefits only after both their parents or grandparents have passed away.
The unique setup of Second-To-Die Insurance offers several key takeaways. Firstly, compared to individual life insurance plans, survivorship policies are often less costly for couples to acquire. This cost-effectiveness results from the insurance premium determination, which is based on the combined life expectancies of the insured parties.
Secondly, the death benefit from a Second-To-Die insurance policy can be strategically utilized to counterbalance the hefty costs associated with settling an estate. Estate-settlement costs often pose a substantial financial burden on the heirs, and the timely receipt of the insurance payout can aid in offsetting such expenses.
Thirdly, the eligibility criteria for Second-To-Die Insurance policies tend to be less stringent than those required for individual term or whole life insurance. This leniency can make survivorship policies a viable option for those who may face difficulties securing individual coverage due to health or age-related factors.
An illustrative example would be a husband and wife holding a Second-To-Die Life Insurance policy with their son as the beneficiary. Upon the husband's death, neither the wife nor the son would receive any benefits. The payout would only occur after the death of the last surviving spouse, ensuring a financial legacy for their son.
One of the significant advantages of Second-To-Die Insurance is its application in estate tax planning. Estate taxes are typically not due until both spouses have passed away, courtesy of spousal exclusion portability. Therefore, the proceeds from the Second-To-Die Insurance policy can be used to meet these tax obligations, ensuring a smooth transfer of the estate to the beneficiaries.
Lastly, integrating a survivorship policy within an irrevocable life insurance trust (ILIT) can serve as a tax-efficient strategy. The death benefit received from the insurance policy, when positioned inside an ILIT, is not included in the estate's taxable value. This structure allows beneficiaries to avoid selling off valuable or sentimental assets to pay estate taxes.
Second-to-Die Insurance emerges as a strategic tool for estate planning, offering an assured financial legacy for children and grandchildren. It facilitates a smoother transition of wealth, mitigating estate settlement costs, and providing a safety net against potential tax liabilities. The specifics of these policies, however, necessitate careful consideration and advice from a knowledgeable financial advisor or estate planning professional.
Summary
Second-to-die policies are also known as survivorship policies, and are primarily used by married couples to provide a guaranteed legacy to their children after they have both passed away. These come in handy for estate planning, when an estate tax bill might be looming for the heirs.
To be clear, this insurance covers the lives of two individuals and provides a death benefit to a listed beneficiary only after the last surviving insured individual dies.
For example, a husband and wife have Second-To-Die Life Insurance with their son as the beneficiary. Once the husband dies, neither the wife nor the son will receive any benefits. Benefits will only be provided after both parents die.
A common purpose for Second-To-Die Life Insurance is to help pay for estate taxes: since there is portability for exclusions to a spouse, nothing is due in estate taxes until both spouses have died.
Putting a survivorship policy inside an irrevocable trust is a popular way to make sure that estate taxes can be paid with a tax-free death benefit (which is not includable in the estate if it is in an irrevocable trust) instead of the estate’s assets. Otherwise the IRS could begin liquidating whatever assets were readily marketable and valuable in order to pay the estate taxes due.