What is a Second to Die Life Insurance Policy?
However, after we pass away we can no longer provide them with emotional support that they yearn for, but we do have the opportunity to take care of them financially with life insurance.
Depending on your need for life insurance, or the size of your estate, “Second to Die Life Insurance”, or Survivorship Life Insurance may be the best coverage you can buy.
In this article, we’ll discuss the uses, pros, and cons of Second to Die Life Insurance, with the inclusion of sample rates.
Quick Article Guide
Here’s what we'll cover in this post:
- Uses of a Second to Die Life Insurance Policy
- Survivorship Life Insurance
- Second to Die Life Insurance Estate Planning
- Benefits of Second to Die Life Insurance
- Business Planning with Second to Die Life Insurance
- Cons of Second to Die Life Insurance
- Start The Life Insurance Shopping Process Early
- Shop the Market to Save Money
One of the best ways for affluent married couples to provide financial protection for their families is by purchasing a “second to die life insurance policy," otherwise known as a “survivorship policy” or “joint-life insurance policy.”
These policies differ from traditional life insurance policies because they insure two people (normally couples), and they only pay out when the surviving spouse dies.
When purchasing a second to die life insurance policy, you should always stay away from term insurance. Term insurance policies usually expire by the age of 80, so the odds are too high of outliving it. Survivorship life insurance policies only pay out when both people pass away, and many females live into their 90’s.
To properly set up your survivorship policy, or second to die life insurance policy, you will want to purchase a permanent life insurance policy. Make sure your policy has fixed rates and no cash value.
The cash value will not to protect your loved ones. If you pass away before withdrawing your cash, the value is lost. If you withdraw the money in your policy while you are alive, the insurance policy payout is reduced.
You’re better off buying a fixed policy and guaranteed rates, because life insurance is not designed to be a profitable investment. In most situations, people avoid purchasing these cash accumulating policies and invest the difference into something more flexible like a money market, or even a savings account. If you want to invest, pay your mortgage down, or beef up your 401k contributions.
In the next section, we'll discuss how survivorship life insurance policies work.
Survivorship policies are great for couples that have a considerable amount of assets like property, but not as much liquid cash in the bank. Survivorship polices are designed to allow your estate to grow as long as possible, tax-free, and provide an influx of cash when needed to preserve your estate from estate taxes. Due to the unlimited marital deduction, the IRS allows married couples to pass assets onto each other, estate tax-free. Survivorship policies take advantage of this estate tax loophole.
A survivorship policy is a life insurance policy on you and your spouse, and this policy will pay off whenever both you and your spouse pass away. This is why these policies are commonly referred to as second to die, they pay off when the second insured person passes away.
These policies are not designed to provide you or your spouse with money while you are alive, they are purchased to leave money behind - creating an influx of cash to settle, or reduce your estate taxes with the IRS. You do not want you heirs to be forced to sell your sentimental assets when they are still mourning from your loss.
Survivorship policies are also more lenient with underwriting and affordable, even if either you or your spouse have health issues. The health and mortality risk is divided with these polices because the insurance company is really focusing on insuring the healthier of the two applicants, or whomever has a longer lifetime expectancy between you and your spouse.
Survivorship/second to die life insurance policies provide liquid cash to pay off any estate taxes that your heirs might run into after you and your spouse pass away. The IRS will collect all of the estate taxes due on your estate within nine months of the surviving spouse’s death.
The readily available cash from the life insurance policy will help you pass on your businesses, real estate, farm, investments, jewelry, or other assets without forcing your heirs into a having “fire sale.”
These policies are also very popular for anyone who is looking to insure the future of a special needs child.
Our client’s assets usually grow more rapidly than the amount of the federal estate tax exemption, which creates a tax liability for their heirs. Most estates gain interest on their assets, and an average property’s value typically increases annually by 7-10%.
Its also important to note that without congressional intervention, the federal estate exemption is set to decrease to about $6 million per individual in 2026. Currently, the federal exemption is at an all-time high of more than $12 million.
Because of the tremendous growth potential for estates valued at $3,000,000 or more, and the uncertainty surrounding future exemptions, most financial planners recommend estate planning to help offset future tax liabilities. The younger you are, the more that your estate will likely grow.
We often work with client’s in their 60’s who understand that their heirs could be facing huge inheritance and estate taxes. Adjusting for inflation alone, most estates will roughly double in size after 20 years. Luckily, we have affordable life insurance options with lifetime coverage and a locked rated for people up to the age of 80.
If you are in your early 50’s and your estate is currently worth more than $3 million dollars, adjusting for 3% inflation alone, you can expect your estate to be worth $7,281,787.41 in 30 years.
If you haven’t started estate planning yet, now is the time to get started. Estate taxes come nine months after the surviving spouse’s death, and the readily available cash from a life insurance policy will help you pass on your businesses, real estate, farm, investments, jewelry, or other assets without forcing your heirs into a having “fire sale.”
Currently, the amount of your estate that exceeds the current year’s estate tax exemption is subject to a federal estate tax of 40% and an inheritance tax of up to 20%, depending on the state that you live in. If you have a large estate, or if you are worried about your heirs owing estate taxes, give one us a call and one of our agents will be happy to help.
One of the great benefits of a second to die life insurance policy is that they’re much easier to get approved than traditional life insurance policies, because the underwriting guidelines are a lot more loosely written.
If your spouse is in relatively good health, these policies may provide someone who is typically considered “uninsurable” an opportunity to purchase a life insurance policy. Since the second to die or joint-life insurance policies do not pay out until the surviving person dies, they also tend to be less expensive than if you and your spouse were to purhcase two separate policies.
Survivorship Life Insurance policies can also be used to help even out estates between your children or heirs.
For Example: Let’s say that you own a lake house free and clear, and it's worth about $750,000. Your eldest son loves the lake house and dreams of raising his family there. Your dream is to pass down this home to your son to make his dreams come true, but you also have a daughter who moved to Los Angeles. She wants to live in a big city in order to pursue her career in journalism.
While you and your spouse have some cash saved up, it’s nothing too significant and will likely only cover your “final expenses.” Rather than passing the house down to both of your children to split, which would most likely result in it being sold, you can purchase a $750,000 survivorship policy to pass onto your daughter.
This allows her to use the cash from the policy as she pleases and your son can live in the lake house like he has always wanted. It's a win-win!
If you’re currently in business with another person, you can purchase a second to die life insurance policy on your partner and their spouse. Likewise, they would purchase the same coverage on you and your spouse, but only if your spouse’s plan on being a part of the business if you or your partner passes away. A survivorship policy will then pay you out the funds to buy out your partner’s share from their heirs or vice versa.
This same principle can also be executed with a “Key Man Insurance Policy.”
As business owners ourselves, our agents at JRC Insurance Group would be happy to help you find a policy that works for you and your partners at an affordable price. Before moving forward with a second to die policy or a key man policy, it’s important to have this discussion with your partner(s) so that there is a clear understanding on what their heirs can expect after they pass away.
As business owners ourselves, we specialize with helping other business owners with the coverage they need. We’d be happy to set up a conference call with your business owners to make sure everyone is one the same page.
Although second to die life insurance policies work great in many situations, they’re not fit for everyone. If you’re in a family where there’s a single breadwinner, a survivorship policy is not a good idea.
Remember these policies will not pay out until both spouses pass away, and income replacement is likely going to be their biggest issue. In this situation, our agents will normally recommend a traditional term life insurance policy instead. An affordable term life insurance policy can protect your family during your income earning years.
Second to die policies can also pose an issue if one spouse dies and the other spouse is unable to keep up with paying the premiums. Affordability should always be considered when purchasing this type of coverage because you do not want the policy to lapse.
It’s important to assess the financial situation of you and your spouse before purchasing a survivorship life insurance policy. In addition, we recommend discussing with your heirs whether or not they would be able to fund part or all of the policy cost if needed.
Take a look at the difference in rates for a policy that locks in your coverage and guarantees your rates until the age of 100. The rates below illustrate the cost difference of a life insurance policy with coverage until age 100 for a healthy 55-year-old male and a 65-year-old healthy male.
Sample GUL Monthly Rates Until Age 100
|Age||$250,000 Coverage||$500,000 Coverage||$1,000,000 Coverage|
*Rates are accurate as of 04/04/2018 and are available to qualifying individuals in excellent health. Rates provided for illustrative purposes only.
Every year after the age of 50, even in perfect health, your rates are climbing by 10% or more.
If you know your estate is going to eventually create a tax problem, getting started sooner will save you a lot of money in the long run. Any life insurance policy will typically take a few weeks to get approved so if you’re up against a deadline, give yourself at least 90 days to get approved and make an informed decision.
If you have questions or if you’re ready to apply, were here to help.
Shop the Market to Save Money
When you’re shopping for life insurance it’s important to make the right decision to protect your family. JRC Insurance Group works with 63 top-rated life insurance companies, and our service is free.
We are not a brokerage with finder’s fees or additional services costs. Whether you buy your policy from the company directly, or work with us, the price of your policy is the same, but we promise shorter hold times.
We licensed and appointed directly with all of the companies we work with, and we can show you everyone’s rates at the same time. No need to contact dozens of companies, we are here to help you find best policy for your needs and budget.
We are an owner operated company and customer satisfaction has been always our number one priority. Give us a call today, or get a free quote. It only takes a few minutes and well save you the hassle of talking to multiple pushy agents! We rely on our reputation not quotas and shareholders. Toll free: 855-247-9555
Managing Partner and Co-founder
Cliff is a licensed life insurance agent and one of the owners of JRC Insurance Group. He has helped thousands of families of businesses with their life insurance needs since 2012 and specializes with applicants who are less than perfect health. In his spare time he enjoys spending time with family, traveling, and the great outdoors.