What Is a Second-To-Die Life Insurance Policy?
Exactly what is a second-to-die life insurance policy and is it the right fit for you? Learn more about this policy and if it fits your needs.
As many already know, there are a lot of different types of life insurance policies available to the average customer. This is a good thing. What fits best for one person or family in a certain situation is not the best fit for someone else. This is definitely the case for those interested in a Second-To-Die life insurance policy.
What Is a Second-To-Die Policy?
A Second-To-Die life insurance policy, also known as a Survivorship policy, is exactly what it sounds like. This is a type of policy to insure two people at the same time. Usually, it’s a married couple being insured, but it doesn’t have to be.
Any two people can enter into one of these policies. Regardless, the Second-To-Die policy insures both of them equally, but does not pay out any benefits until both of them have passed away.
This is different from a normal life insurance policy, of course. In a normal policy, once the insured has died the named beneficiary or beneficiaries get the payout, and the policy is then considered closed. With the Second-To-Die policy, however, nothing changes, and the policy continues, until both parties have died.
This sort of policy makes sense in situations where a large estate is involved, the fate of a business is at stake or one of the parties is finding it difficult to get life insurance on his or her own. This also helps make life easier when it comes to issues like estate tax and inheritance. For all the benefits and more, read on to find out about Survivorship policies and all that they entail.
Who Should Get a Second-To-Die Policy?
Right from the start, it is important to note that the Second-To-Die policy is not a good fit for everyone. A regular, average family with average income and assets might not have any need for a policy like this, but there are certain situations where this can make sense.
For example, if you and your partner/spouse have a high net worth and are worried about estate taxes and other issues that go with inheritance, then a Second-To-Die policy is a way to help offset and mitigate those costs. Currently, estates valued at over $11.4 million are subject to estate taxes, so anything that goes over this amount is subject to taxes, and a Second-To-Die policy can be a way to help offset those costs.
Another example might be business owners or investors whose wealth is tied up mostly in property and other non-liquid assets. This sort of policy can be used to help their business stay afloat after their passing.
A third group that can benefit from this type of policy is couples who have a guaranteed income and don’t necessarily need a cash payout when their spouse passes. In these cases, the couple would rather have all the benefits go to children or grandchildren. Second-To-Die policies make this possible while saving money in the long run.
The Benefits of a Second-To-Die Policy
If you’re wondering why this sort of policy can make a difference in situations like these, consider the following benefits.
Second-To-Die Policies Can Be Less Expensive
Why? Because with a Survivorship policy the insurer is counting on the idea that your premiums will be spread out over a longer period of time, meaning less risk in the future. In a typical insurance situation, where each individual has coverage, each person pays a premium on their policy.
The life insurance company has to assess each person’s risk separately. As you know, these companies always base risk on worst-case-scenario thinking. What that means is that individual premiums can be high.
With a Second-To-Die policy, however, the company is now assessing the risk for both parties to pass away. Since the death of one partner doesn’t trigger a payout, and the other partner keeps paying, the company can look forward to receiving payments for longer. This results in lower premiums. In some cases, these premiums can be significantly lower.
A Second-to-Die Policy Can Help The Uninsurable Get a Policy
Persons who suffer from chronic, pre-existing conditions are high risk. These people often find life insurance policies either impossible to obtain. Or so expensive that it amounts to the same thing.
A Second-To-Die policy can sometimes help with this issue because the insurance company is more willing to consider insuring these individuals. Counting on the fact that most likely their partner or spouse will outlive them, keeping the policy active. So, not only is the one person still insured, but it ends up costing far less.
A Second-to-Die Policy Can Be Great for Estate Planning
Under current laws, when one spouse dies, the assets are able to go to the other spouse tax-free. However, this is not the case when the second spouse dies and assets become part of an inheritance.
At this time, the beneficiaries of the estate must pay an estate tax. Because estate taxes are high, it can be very costly to inherit wealth.
For those able to plan around this, Survivorship policies can help in this situation. By providing much needed cash to help cover the costs of these taxes. In short, the insurance policy covers the cost of the taxes. So the beneficiaries are then able to collect more of their actual inheritance.
So far, we’ve gone under the assumption that the couple shopping for a Second-To-Die policy are married. They are looking towards the future of their estate, but it doesn’t have to be this way. This sort of policy can insure any two people, regardless of their relationship.
This includes business partners worried about the future of the company they have created. In situations like this, there can be worry about what will become of the business after both owners have died.
Will only one person take it over? What about the other heirs? How can we make sure they receive a fair share? Survivorship policies help provide funds to ensure that each heir has compensation. This is whether they are taking a share of the business or receiving other assets instead.
The Drawbacks of a Second-To-Die Policy
Of course, as helpful as a Survivorship Policy can be, they aren’t for everyone. There are drawbacks to consider, just as there are with any new policy.
The first, and most obvious, thing to consider is the fact that there is no payout with a Second-To-Die policy until both parties have passed away. This is fine if each of the parties can exist financially independent of the other. But if one of them has income that is indispensable, then this is definitely not for them.
The second most obvious concern for this sort of policy concerns the uncertainty of relationships over time. While the married couple might be happy now, who knows what will happen years down the road? They might find themselves divorced.
The same goes for business partners. Maybe everything is good now, but it’s not impossible that the relationship could sour, and the partnership dissolves.
In either case, it’s important to know that the policy does not change. Even if the couple is not on speaking terms, the policy still covers both of them. Premiums must be paid and there is no payout until the death of both parties. Of course, at this point it’s probably best to contact the insurance company and change. Ff not outright cancel the policy.
No Cash Value
Another drawback to this sort of policy is that this sort of policy is not a cash value policy. This means that, it provides benefits down the road, this sort of policy but doesn’t increase or diversify your existing portfolio. It exists solely to provide the largest possible payout when both parties have passed.
The final drawback to consider is that, unlike some other types of policies, the Survivorship policy can not be altered. Once it goes into effect, the terms, the premium, the payout and any other features of the policy can not be changed. Even worse, in many cases they can be almost impossible to cancel. Especially if one party is having second thoughts, but the other wishes to continue.
Contact Us Today
The takeaway from all this is simple. If you are in one of the many situations described above, then a Second-To-Die Policy might be a policy worth considering. It’s not without its drawbacks, though. This means that careful planning and thought is necessary before taking this sort of plunge.
If you would like to know if one makes sense for you, contact us today so we can discuss your options and see if this is the right fit for you and your situation.