If you have ever shopped for life insurance, then you know it can be quite overwhelming. There are many different options. Two of the most popular are term insurance and whole life, both of which you have likely heard of. However, today, I’m introducing you to another type of life insurance policy. The second-to-die life insurance policy is a policy which is often employed as part of an estate plan.
These policies are essentially one insurance policy on two people at the same time. In order for a beneficiary to collect on these types of insurance, both the insured persons must dieClick to tweet
Originally, second-to-die insurance policies were created in the 1980s as a way to help delay any estate tax owed by a spouse that may still be living. However, today, second-to-die policies are often used in conjunction with an estate plan to help cover estate taxes, shift monies to beneficiaries in a tax-free method. In an estate plan, the planners are strategizing the methods to leave the beneficiaries the amount of money from the estate. Often taxes are the driving force behind elaborate estate plans. A policy can also help with taxes and even cover any other estate settlement costs that may be owed after their death as well.
In addition to estate tax planning, second-to-die policies can help in a few other areas. Estate equalization or cash leveraging is often a common practice. Your parents may no longer need life insurance for income planning purposes or debt elimination purposes. Yet, they may have a strong desire to leave their beneficiaries with equal amounts of money utilizing life insurance. A second-to-die policy may be a good choice. For example, let’s just suppose you are the youngest of two children and parent owns a business which is worth 1 million dollars. However, your oldest sibling has taken a strong interest in the business and has worked in the business for 15 years. Your older sibling has grown the company and now their income is reliant on this company. However, you really don’t want to be a part of the company and you realize that your older sibling will probably inherit the company upon your parents passing. You assume, that your parents are going to leave you an equal portion. However, unbeknownst to you, they do not have an extra 1 million dollars in assets. They only have $500,000. A second-to-die policy could be purchased for 1 million dollars and when your parents pass away, they could leave you the life insurance and your sibling the company. Using a second-to-die policy may not be a bad cash leveraging choice for estate equalization.
One of the greatest advantages of a second-to-die policy is the fact that the premiums are generally significantly lower than the premium of a policy covering one life. Since these policies cover more than one individual life, the risk to the insurance company is greatly reduced. And with the joint coverage, those in poor health may qualify for coverage with greater ease than if they were applying for an individual policy. I have seen a husband who was denied coverage for individual coverage added to a 2nd-to-die policy to lower the overall premium for the family.
While I don’t recommend these for the average “Jane and Joe”, second-to-die life insurance policies can be an excellent tool for estate planning purposes. Speak with your financial advisor for more clarification and how they may help your specific situation. Or contact me and I can help you determine if they might be a good idea for your overall financial plan.