Second-to-die life insurance is a type of life insurance policy that jointly covers two individuals, typically spouses, on the same policy. Alternate names for this type of policy include joint life insurance or survivorship life insurance.
The insurance policy is paid out only upon the death of both of the covered parties. Typically, these are variations of universal life policies, but they can be purchased through some insurers as a term policy.
Why would people buy second-to-die policies? The usual reason is to deal with estate taxes on wealthier couples. When one spouse dies in a wealthy couple, the estate passes to the second spouse tax-free through the unlimited marital deduction. However, when the second spouse dies, the cumulative taxes come due on the estate. A second-to-die policy allows heirs to pay part or all of these taxes using the tax-free death benefit. (That is why second-to-die policies are sometimes referred to as “heir care.”)
There are a few other valid reasons for purchasing a second-to-die policy, including the following:
- Supporting Children – There may be any number of reasons you would prefer to have the benefits directed toward your children. For example, you may have a mortgage on a house that the children would inherit, where a second-to-die policy would provide some mortgage payment relief. Another example is to set up a trust as the beneficiary to take care of a disabled or special needs child or to pay for educational costs for grandchildren.
- Supporting Charities – Similar to the trust example, you can set up a second-to-die policy with your favorite charity as the beneficiary.
- Affordability – Since payout requires the death of both policyholders, the overall risk of early payout is lowered and the premiums are considerably lower — often around thirty percent cheaper on average, and more so if one individual has a health condition that would make separate policies unaffordable. Premiums are generally based on the average age and the collective health of both policyholders.
- Cash Accumulation– As part of a universal life policy, second-to-die policies have significantly lower cost of insurance. It is possible to look at them simply as a form of investment as the cash value builds — but compare this to other investment options.
- Business Reasons – With a family business where one child is integrated into the business and is part of your succession plan, you can enter a second-to-die policy with that child and name the others as beneficiaries. This equalizes the inheritance without potentially breaking up the business. Typically, there are other options for non-family business succession plans, but it is possible to use a second-to-die policy there as well.
Second-to-die policies are not without their downsides. Since no benefits are paid out to the surviving spouse upon death, he or she must be in sound enough financial shape that the benefits are not necessary to get by. In addition, the surviving spouse must continue to make payments or the policy will lapse — leaving potential heirs in the same position they would have been in without insurance.
There may be preferable options for you in any of these situations, and it is best to contact an expert in insurance (preferably an independent source such as a financial planner who is not motivated to sell you a policy). Review your options carefully, and should you choose a second-to-die policy, make sure that both parties are in agreement over how to proceed and what needs to be done after the first party dies, and your wishes should be upheld if you are the first one to pass on to the other side.