Jun. 13, 2007

We have been advised by a financial advisor to purchase a second-to-die life insurance policy. This advice came after he reviewed our current investment strategy and net worth. We are middle-aged, have one son in college and a daughter in high school. We have not heard of this investment strategy before. The advisor has said it is a tax-advantaged way to grow our money.

Darnell, California

Dear Darnell,

In general, survivorship or "second-to-die" life insurance policies are purchased to help beneficiaries pay estate taxes when both a husband and wife have died. While cash value will accumulate in a second-to-die policy, it is subject to the same taxation restrictions as traditional life insurance policies, according to Elaine Tumicki, assistant vice president, LIMRA International, a financial services trade association.

Cash value should not be considered a traditional investment because any partial withdrawals or loans will reduce your death benefit. So if you don't pay it back, your beneficiaries will have to. Also, if you partially withdraw or take out a loan against your cash value, and the withdrawal or loan amount exceeds the premiums you have paid into the policy, you will be hit with a tax bill.

Unless your advisor is referring to making sure your heirs don't have to sell real estate or other valuable assets to pay estate taxes, a second-to-die life insurance policy may not be the right plan for you.

I would also discuss with your advisor whether or not a survivorship policy is appropriate for you in light of the new federal tax legislation, which phases out the estate tax by 2010.

For more information on survivorship insurance, read The advantages of second-to-die life insurance policies and for more information on cash value in life insurance, read Cash value in life insurance

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Disclaimer: We are journalists, not financial planners or insurance brokers. Nothing we say should be interpreted as a recommendation to buy or sell any insurance product, or to provide other financial or legal advice.