Second-To-Die Insurance

Second-to-die insurance is a type of life insurance on two people (usually married) that provides benefits to the beneficiaries only after the last surviving person on the policy dies. This differs from regular life insurance in that the surviving partner doesn't receive any benefits after the spouse dies. Thus, second-to-die insurance is used for estate planning.

Parents who take out this type of insurance are usually thinking of their children. For example, a second-to-die insurance policy could be designed to pay estate taxes or support any surviving children. It is also called "dual-life insurance" and "survivorship insurance".

Generally, second-to-die insurance is used for estate planning, and usually they cover two or more people for less money than individual policies would cost. The death benefit from a survivorship life insurance policy is typically calculated to pay federal estate taxes and other estate-settlement costs owed after both spouses pass away. The second-to-die life insurance product was developed in the 1980s when a new law enabled married couples to delay federal estate taxes until both spouses passed away. This law helped surviving spouses avoid depleting their finances to pay big tax bills, which put additional financial pressure on other remaining heirs.

A second-to-die life insurance policy starts off with an annual premium that covers the death benefit. The excess grows tax-deferred, building cash value that is supposed to cover some or all of higher premiums as you age. In the 80s and 90s, policies were sold with projections showing earnings of 6 to 12 percent interest. With the Federal Reserve keeping interest rates low for the better part of the past decade, rate have been closer to 3 or 4 percent, with a minimum guarantee.

More economical. The premium is based on the joint life expectancy of a couple, and because it pays nothing until both spouses die, the premium is significantly less expensive than buying separate policies for both people with the same total dollar amount in benefits.

Easier qualification. If one person isn't in great health, it doesn't matter as much because both policyholders must die before benefits are paid. Otherwise, the person in bad health may be denied life insurance if applying for a single policy.

Estate planning. In some cases, second-to-die life insurance can actually help build an estate, not just protect it from taxes. Like traditional life insurance, the death benefit of a second-to-die policy can ensure your beneficiaries receive a minimum amount of money, even if all the savings of the insured were depleted during their lives.

Maintains an estate. Many people buy second-to-die life insurance policies in order to ensure their estate transfers to their beneficiaries intact. For example, they may want to know the family cabin will remain in use for generations, rather than be sold to pay death taxes.