Second-to-die life insurance, also known as survivorship life insurance, is an interesting and affordable policy option you may want to consider for estate planning purposes.
A second to die life insurance policy is set up to insure two individuals, usually married couples, and does not pay out until the surviving spouse dies.
This means that if you and your spouse take out the policy, neither of you will collect a death benefit payout when the other spouse dies, but life insurance will be paid after your death to your beneficiaries, which can be heirs, a charity or trust that you set up. Since second-to-die insurance is one policy that covers two individuals, it’s usually cheaper than two individual life policies.
Why Would I Choose A Survivorship Life Insurance Plan?
You may choose survivorship life insurance to protect your estate, pay estate taxes on behalf of heirs, or set up a trust to support your children or a special needs child. A second-to-die policy makes sense for wealthy individuals looking to avoid estate taxes paid out-of-pocket by heirs.
Many experts recommend buying this type of life insurance only if you have an estate worth more than $3,000,000 or have other extenuating circumstances; however, estate tax laws and limits are changing every year.
Survivorship life insurance is also a good option if one spouse has a difficult time qualifying for a life insurance policy alone. These policies are more likely to allow coverage for spouses who may be considered “uninsurable” alone due to medical reasons.
Finally, life coverage that pays out when both parents die can offer financial security for young, dependent children.
- Cheaper than 2 individual life policies
- Easier to qualify for and buy
- Preserves your estate
- Pay estate taxes due
- Builds your estate with wealth replacement
One of the most common uses for second to die life insurance is to cover estate taxes, so you can pass your estate onto your children intact. This may be a good idea if you have business interests, real estate, investments or other assets that may be difficult to liquidate to pay the estate taxes that are owed.
Using a death benefit payout to cover taxes is especially prudent when your estate is primarily comprised of illiquid assets that would need to be sold at a discount prior to maturity.
Since spouses do not need to pay estate taxes when assets are passed between married couples, life insurance that pays out on the first spouse’s death is not needed. Talk to a financial planner or estate attorney to get an estimate on the amount your estate will owe in taxes before you take out the policy.
Additionally, there are different ways you can set up your estate to minimize your tax liability.
Another reason you may choose to buy second-to-die life insurance is to make it easier to divide your estate between your children.
For example, you may be planning on passing the family business to your oldest child, who is involved in the day-to-day operations and is part of your succession plan. You can purchase this policy and name the other children as beneficiaries so that they also receive an equal inheritance without breaking up the business that you’ve built.
If you are a business partner or maintain ownership in a company, you may want to purchase life insurance on your partner and his spouse. This is only necessary if the other partner’s spouse intends on staying involved in the business after the first spouse’s death.
A survivorship policy will then pay you the funds needed to buy out the other half of the business from your partner’s heirs. This is a good business practice that can also be executed with key man life insurance, but you should discuss it with your partner and possibly the heirs so there is a clear understanding of what will happen when they pass away.
Financial Security – Trusts
The final reason you may choose to purchase survivorship coverage is to set up financial security for your children and other family members. There are a wide variety of trusts that you can establish, and the type you choose really depends on your family’s financial and circumstantial situation.
In this case, the trust will be the beneficiary of the policy and the administrator will make sure that the beneficiaries receive the money according to the guidelines set forth in the trust.
In addition to the trusts listed below, you may set up an education trust that will cover your grandchildren’s college tuition or another to protect a child that is a spendthrift who may need additional financial support after you pass away.
Special Needs Child Trust
If you have a child with special needs, your greatest concern may be what happens to your special needs child after both parents die? You may need to set up a trust to care for him/her after both you and your spouse pass away. To solve this problem, parents can create a special-needs trust that is funded by a second-to-die life insurance policy on both parents. A lawyer or trustworthy family member can act as the administrator.
A special-needs trust makes the child a discretionary beneficiary, meaning the child can only expect and receive what the trustee gives him/her. Since the child has no control over the trust and cannot demand any benefits, the assets are not considered the child’s.
The distinction is important because the child can still qualify for need-based government grants, scholarships, and benefits, such as Medicaid. This may be the best way to ensure your child continues to receive the highest-quality of care for the rest of his life.
Dynasty Trusts (Trust Funds)
A dynasty trust is a trust fund that will last for generations. You can use the second to die life insurance policy to help fund this type of trust, as well as funding it with your own assets and wealth.
You will need to establish specific rules and pay out details so that the trust is only allowed to disperse funds for certain reasons, such as paying tuition or education costs, purchasing a home, starting a business, or covering medical bills. By limiting the distribution of funds, parents ensure that the trust’s assets can be passed down over the generations.
It is important to take the time to review the laws surrounding an irrevocable life insurance trust with a lawyer.
Wealth Replacement Trusts
A wealth replacement trust allows you to spend the wealth you’ve accumulated over a lifetime or donate to your favorite charity without and still leave your children an inheritance.
To accomplish, parents can establish an irrevocable life insurance trust funded by a policy. Since the proceeds from a life insurance policy are un-taxed, you can both give to charity and leave an estate unburdened by taxes to your children or grandchildren.
Dangers of Second to Die Life Insurance
The biggest risk you run with second-to-die or survivorship life insurance is if the surviving spouse stops paying the premiums due to a change in the family. This can happen if you and your spouse divorce after buying life insurance, and one of you remarries.
For example, if your wife remarries, her new husband might resent the fact that he is spending money on life insurance coverage for children that aren’t his and decides to stop paying premiums.
The policy would lapse and the children would no longer have protection. In this situation, the father would have been better off buying traditional term life insurance. Automatic payments can help with this, but it is important that the surviving spouse has enough income to continue to make the payments independently.
Simply put, in the right financial circumstances and family situations, second-to-die life insurance can make more sense and offer better benefits than a traditional policy. As always, consider the pros and cons between different types of life insurance before buying.