Imagine a life insurance policy that doesn't pay off when you die. Second-to-die life insurance fits that description, and might be a worthwhile purchase for people who will leave behind estates worth $1.5 million or more.

A second-to-die life insurance policy, or survivorship life as it's sometimes called, insures two lives — usually a husband and wife. Unlike traditional life insurance, the death benefit isn't paid out until the second insured person dies.

Usually, the death benefit from a second-to-die life insurance policy is intended to pay federal estate taxes and other estate settlement costs owed after both spouses pass away. The product was developed in the early 1980s in response to a law that enables married couples to postpone federal estate taxes until both spouses pass away.

Under federal tax law, there is a marital deduction permitting you to leave an unlimited amount of assets to your surviving spouse. If you leave all your worldly possessions to your husband or wife, no federal estate taxes are owed at the time of your death. Those assets then become part of the estate of the spouse and might be taxed when the surviving spouse eventually dies, assuming he or she hasn't remarried. The death benefit from a life insurance policy could help pay those taxes.

The second-to-die sales pitch

Agents who sell second-to-die life insurance often point out that your beneficiaries can pay estate taxes with the proceeds of your policy, so they won't be forced to sell your house quickly or liquidate assets to pay the federal estate tax bill. Furthermore, when you buy the policy, you'll pay less than the estate taxes will cost.

Sometimes, a life insurance agent and the policyholders' lawyers will construct a financial plan reducing the tax burden of wealthy individuals by creating trusts and using second-to-die life insurance as part of the estate-planning strategy.

Advantages to second-to-die life insurance policies

• Less expensive. Second-to-die life insurance is usually less expensive per thousand dollars of death benefits than traditional single-insured life insurance. In the case of second-to-die policies, the premium is based upon the joint life expectancy of the insureds. Since the insurance company owes nothing until both insureds die, the premium will be significantly cheaper than buying separate policies for both people.
  
  
• Easier to buy. It's easier to qualify for a second-to-die policy than for single insured life insurance. Since both policyholders must die before the benefit is paid, the insurance company is less concerned that one of them might not be in good health. Companies are often willing to write the policy even if one of the customers is "uninsurable" by traditional life insurance standards. Of course, each insurance company will have a different definition of "uninsurable."
  
  
• Builds your estate. In some cases, second-to-die life insurance is marketed as a way to build an estate, not just insulate it from taxes. Like traditional life insurance, the death benefit of a second-to-die policy can ensure that your beneficiaries receive a minimum amount of money, even if you spend every dime during your lifetime.

• Preserves your estate. A second-to-die policy appeals to individuals who feel strongly about preserving their assets for heirs. They buy a second-to-die policy so their estate transfers intact to their heirs, with the life insurance paying the taxes.
  
  
• Pays your estate taxes. Federal estate taxes aren't the only concern when someone dies. The estate might owe income taxes on individual retirement accounts and tax-deferred plans held by the deceased. Unless the money is a qualified distribution from a Roth IRA, the IRS hasn't taken its share yet and wants to be paid.

In addition, your state may also impose inheritance or estate taxes. Many states do not have a marital deduction, so the surviving spouse might owe state inheritance or estate taxes at the time of his or her partner's death.

• Variable life insurance policies let you play the market. Second-to-die life insurance policies aren't limited to whole life policies. Companies offer second-to-die policies that are variable universal life policies. This type of policy lets you invest your premiums in a separate account whose value will fluctuate based on the performance of the market.

Not for small-fry estates

Second-to-die life might not make sense as a source of funds to pay estate taxes for people with small estates. There may be other reasons to purchase second-to-die life insurance, however. For example, parents with special needs children could consider second-to-die policies to provide for those children after both parents have died.

Questions to ask before you buy

With any type of second-to-die life insurance, find out how the policy would be affected by a divorce or a change in estate-tax laws. Some insurance companies offer a rider, without charge, that permits you to split the policy into two single-insured policies in certain circumstances.

If you're considering purchasing a second-to-die life insurance policy, consider consulting an attorney who specializes in estate planning.