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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." |
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.
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.
- 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.
| "This kind of insurance appeals to individuals who feel strongly about preserving their assets for heirs." |
- 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.
| "Second-to-die life insurance may not make sense for people with small 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.
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.
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