Second-to-die life insurance is a type of joint life policy that pays benefits to the beneficiaries only upon the death of last remaining insured. It is also known as last survivor joint life insurance.
Second-to-die life insurance is typically used for estate planning to pass death benefits along to heirs, generally with the use of an irrevocable life insurance trust (ILIT).
This type of joint life policy is different than a typical life insurance policy that pays a benefit to the spouse upon the insureds death. With a second-to-die policy, the surviving spouse gets no benefit.
However, one benefit of second-to-die insurance is a lower cost due to the insurer having a longer period before needing to pay out a claim.
Key Takeaways:
- Second-to-die insurance is also known as last survivor joint life or just survivorship policies
- It is primarily used for estate planning purposes as the spouse doesn’t get paid after the death of the insured and the benefit is only paid after both insureds pass.
- Second-to-die insurance is generally less expensive for couples to purchase than buying separate plans as the premiums are determined using the joint life expectancy
How Second-to-Die Life Insurance Works
Second-to-die life insurance is almost universally a permanent life insurance product and the death benefit gets paid on the death of the second named insured.
Like all permanent life insurance, you pay premiums into the policy and if you contribute enough, the policy will remain with you until both insureds pass. Additionally, permanent life insurance comes with a cash value account that is funded with a portion of your premium. This account is invested depending on the type of product and the investment you elect, and can grow over time.
Second-to-die policies can be whole life or universal life insurance. There are many types of universal life (UL) including guaranteed UL (GUL), variable UL (VUL), index UL (IUL), and recently index variable UL (IVUL).
Second-to-die life insurance is often structured to be fully paid up near retirement age. This means you have contributed enough premiums by retirement that the policy is guaranteed to remain active until both partners die without requiring any additional payments.
This is done so there isn’t an expense left for the surviving spouse. You don’t want to have the first spouse pass and the second spouse be unable to continue paying for the policy and have to lapse, losing any coverage and the benefit.
Using Second-to-Die Life Insurance for Estate Planning
The second-to-die life insurance products were created in the 1980s after changes to tax law allowed for married couples to delay federal estate tax until both spouses passed away. This change was driven by a desire to help the surviving spouse keep their retirement savings by avoiding big tax bills when their partner passed.
Survivorship life insurance tends to be a good fit for wealthy families that want to pass on an inheritance and don’t need income for the surviving spouse.
An additional use case is if there is a permanent dependent and you want to ensure they are protected after the passing of both parents.
Who Needs Second-to-Die Life Insurance?
Second-to-die life insurance is typically a good fit if you are:
- A High Net Worth Family – as it can help with your heirs estate tax
- Looking to leave an inheritance – as there are tax benefits with life insurance
- Avoiding Probate – life insurance avoids probate
- Making Charitable Donations after death
- A Business Owner – as it can help keep your business from liquidating
- A couple with one unhealthy spouse – since the policy pays out on the death of the 2nd spouse, you can get significantly cheaper coverage for the unhealthy life
Benefits and Drawbacks of Second-to-Die Life Insurance
There are many benefits and drawbacks to a second-to-die life insurance policy that you need to consider when making a decision. These products tend to be niche and focused on protection & estate planning.
Pros of Second-to-Die Life Insurance:
- Less Expensive – Survivorship products are almost always cheaper than 2 individual policies. The insurance company has less risk since there are 2 lives that need to pass before they need to pay the death benefit.
- Easier to Qualify – The insurance company can take into account the younger or healthier life to lower the total cost
- Estate Planning – Whether you are looking to help pay for estate taxes or want to leave an inheritance or charitable donation.
- Family Owned Business Succession Plan – if some of your survivors will run a business, you can leave the life policy to the other children for estate equality
Cons of Second-to-Die Life Insurance
- Payout delayed to the second death – This type of product isn’t a tool to protect your spouse. It could actually end up as a burden to a surviving spouse as they will need to continue paying the premiums.
- Marital changes impact the premium – If you divorce, the policy premiums still need to be paid. And if a spouse remarries, it could cause issues as the beneficiaries many not include the new spouses heirs. (Although, there may be ways to split policies depending on the product).
- Not focused on cash value growth – Second-to-die life insurance is protection focused, which means they tend not to have high cash value growth ability.
The Final Word
Second-to-die life insurance is a niche product that does a good job in estate planning for wealthier families. If you are financially secure enough that your surviving spouse is able to cover all their expenses after your death, then using a survivorship product to help with estate planning can be the right fit.
Additionally, if one spouse has deteriorated health that makes it impossible to get coverage, you can use a survivorship product to get them covered.
If you want a joint policy that protects your spouse in case one partner dies, you can choose a first-to-die joint life insurance product.
However, it can be a burden on a surviving spouse or during a change to marital status and has limited cash value growth typically.
If survivorship life insurance seems like a good fit, you should work with a financial advisor as there are many types of products that come in the form of the many different types of life insurance.
Frequently Asked Questions (FAQs):
Second-to-die life insurance is a product that only pays the death benefit on the death of the 2nd named insured. These are typically permanent life insurance products and used for estate planning purposes.
Survivorship life insurance is typically used by wealthier families as a way to reduce estate tax exposure for their heirs. Since the product doesn’t provide protection for the surviving spouse, you need to be financially stable enough that they can continue to pay premiums on their own until their death.
There are many benefits for a second-to-die life insurance policy with the top 4 being:
1) Less Expensive
2) Easier to Qualify
3) Estate Planning
4)Family Owned Business Succession Plan
There are drawbacks to a second-to-die life insurance policy. The top 3 cons are:
1) Payout delayed to the second death
2) Marital changes impact the product
3) Not focused on cash value growth
Joint life insurance is any product with more than one named insured. It can be a survivorship product or first-to-die. A first-to-die pays out upon the death of the first insured whereas a second-to-die pays out on the second death.