A second-to-die policy is designed for couples who want to share a life insurance policy with specific beneficiaries, such as children and grandchildren. The life insurance company will only make a payout to the beneficiaries after the last survivor passes away. We’ll explore what a second-to-die insurance policy is and what to consider before jumping into this life insurance product.
Keep in mind that it is often a good idea to discuss your unique situation with a financial advisor for help with decisions about your insurance options.
What Is a Second-To-Die Insurance Policy?
A second-to-die policy is sometimes called a survivorship universal life insurance policy. As the name suggests, the death benefit is only paid out to the beneficiaries after the second policyholder passes away.
Married couples may be the most likely to pursue this policy. But it’s an option for any pair that shares a common financial interest. Other potential pairs for a second-to-die policy include those in a civil union, cohabitating, or business partners.
In many cases, this type of policy is used by married couples to pass on wealth to their children. But other partners, including business partners, may choose to take advantage of this insurance option.
The major difference between this policy and other options is that the surviving partner won’t receive any benefits when the first partner dies. Instead, the insurance company withholds the proceeds of the policy until the surviving partner dies.
Second-to-die policies can include a cash value that accumulates over the term. As you age, the cash value grows to cover higher annual premiums. Over time, the cash value of your policy will grow tax-deferred.
How Second-to-Die Policies Work
In general, this type of insurance policy is designed to pay estate taxes or pass wealth to surviving heirs. Policyholders will make annual premium payments to cover the death benefit. After both policyholders pass away, the insurance company will issue a death benefit payment to the beneficiary of the policy.
The goal of a second-to-die policy is to limit the tax burden of a surviving partner. Instead of paying federal estate taxes upon the first spouse’s death, the surviving spouse can avoid draining their reserves to cover estate tax bills.
Second-to-die policies have some similarities to joint insurance policies, another type of shared life insurance between two people. Joint life insurance generally comes with a “first-to-die” provision. It gives a payout to the surviving partner after the first insured person dies. But some joint life insurance policies are written as second-to-die contracts.
Benefits of a Second-To-Die Insurance Policy
Here’s a look at the advantages of a second-to-die policy:
- More affordable. In most cases, premium payments for a second-to-die life insurance policy are significantly less than paying two separate premiums for the policyholders.
- Easier to qualify. With traditional life insurance policies, poor health can make it challenging to lock in a policy. Since there are two policyholders, it’s possible to get a policy even if one partner is in bad health.
- Estate planning tool. A life insurance policy is a useful estate planning tool. Not only can it help with tax planning, but it will also issue a death benefit to your beneficiaries.
- Customizable. When choosing a policy, you can work with an insurance company that offers customizations for your unique situation.
Drawbacks of a Second-To-Die Insurance Policy
There are also some potential disadvantages to consider:
- Sticky situation if partners split. A divorce can result in awkward negotiations over how the policy gets handled.
- No benefits for surviving partner. In situations where policy holders have removed one or more persons as beneficiaries but continued to pay premiums on the policy, the partner who survives won’t receive any death benefit.
- The final payout can be decades later. If one partner lives significantly longer than the other, the beneficiaries will be waiting around a long time before receiving a death benefit.
When Is a Second-To-Die Policy a Good Idea?
A second-to-die policy isn’t the right life insurance policy for every situation. But in some cases, it makes the most sense. Typically, wealthy families purchase this policy with the goal of passing funds to their heirs. It’s not a good idea if either surviving partner would struggle to make ends meet after the death of the other. If either spouse would need a death benefit to meet financial obligations, then it’s smart to opt for policies that prioritize the fiscal well-being of both partners.
The Bottom Line
Life insurance is a helpful tool to protect the interests of your heirs. If your spouse won’t need a death benefit to make ends meet, then a second-to-die life insurance policy is a relatively affordable way to provide for other beneficiaries.
Life Insurance Tips
- When choosing a life insurance policy, the right fit varies based on your unique circumstances. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Finding the right life insurance policy starts with asking yourself some questions about your goals. If you aren’t sure how much coverage you need, check out SmartAsset’s free life insurance calculator.
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