Second-to-die life insurance, commonly referred to as joint life or last-to-die insurance, is a form of life insurance that is purchased for estate planning and is generally used to provide liquid funds to pay your eventual federal estate tax*. Survivorship life policies are also used in estate planning to provide funds to take care of a child with special needs.
What is Second-to-Die Life Insurance?
Second-to-die insurance is a life insurance policy that is designed to cover two individuals and only pays out the policy proceeds at the death of the second person, hence “last-to-die”. In most every case it is a husband and wife that are insured and is purchased solely for estate planning reasons. At the second death, the policy proceeds are paid to the named beneficiary which, for tax purposes*, is normally an irrevocable life insurance trust.
Because they cover two lives and only pay out at the second death, survivorship life insurance policies are generally less expensive than individual life insurance policies.
Second-to-die policies are usually some form of permanent insurance because they are designed for the long term. The two most common last-to-die policies are traditional whole life and lifetime guaranteed survivorship universal life insurance. There are reasons to consider both, but survivorship universal life (SUL) is in most cases the best choice. SUL policies are great because they do not build excessive cash value and have premiums similar to term life insurance while offering lifetime guarantees.
Wealthy people and those that have substantial net worth have long known the benefits of using second-to-die insurance to pass wealth and to keep their estate “whole”.
Second-to-die life insurance policies are perfect for estate planning and especially for paying the federal estate tax. The chief reason is that last-to-die policies provide the liquid funds at the exact time the federal estate tax bill is due. For more details see, using life insurance to pay federal estate taxes.
How does a Last-to-Die Life Insurance Policy Work?
The process of applying for second-to-die insurance is exactly like buying individual life insurance with the exception that 2 lives are covered. An application for insurance is completed and signed by both you and your spouse and a life insurance exam is required. In most cases, actual medical records from your physician(s) are required to complete the underwriting process. Once your medical information is reviewed, your policy is approved and issued. A check and maybe a couple of signatures are all that is needed to make your policy effective.
One strategy for paying the premiums for an SUL policy is with annual gifts that are made to an irrevocable life insurance trust (ILIT). The ILIT owns the life insurance policy and pay the premiums with the funds that you “gift” to the trust. At the last death, the insurance company writes a tax free check for the death benefit to the ILIT which can then use the funds to pay your federal estate tax. This is a very effective means of removing assets from your estate and leveraging your net worth. It also provides liquidity and, if structured properly, assures that you estate transfers in its entirety.
Advantages of Joint Life or Survivorship Life Insurance
There are several advantages to purchasing joint life insurance policies. Some of the most important are listed below.
Survivorship Life Policies are Cost Effective. Because two lives are covered and the policy doesn’t pay until the second death (likely a longer life expectancy), the cost for these policies is usually cheaper than an individual policy.
Last-to-die Policies Provide Liquidity. If you have substantial real estate holdings or a large percentage or your net worth is in non liquid assets, a last-to-die policy can easily provide liquid cash. This protects your illiquid property and insures that you do not have to “fire sale” your real estate or other assets to pay your estate taxes.
Second-to-Die Policies Create Leverage. You can essentially buy large amounts of life insurance that will provide huge benefits to your heirs without a significantly high outlay. You can essentially buy dollars for pennies!
Survivorship Universal Life is the Best Tool for Paying Your Estate Taxes. As mentioned above, if you have a large estate, there is no better vehicle for paying estate taxes.
How to Find the Best Second-to-Die Life Insurance Policy
As a general rule, guaranteed survivorship universal life insurance is the absolute best type of second-to-die policy to purchase. The chief reason is that these policies are not concerned with building cash value. In other words, when you buy an SUL policy, you are paying for the death benefit only which is what you want to do. Remember, the proceeds of the policy are going to pay estate taxes so the less you have to pay out of your pocket the better. In fact, you should be able to buy dollars that will pay your estate taxes for a highly discounted rate.
Since the main purpose for the insurance is for paying estate taxes, you will need to make sure that your policy is guaranteed for your lifetime. The last thing you want to do is to purchase a non-guaranteed policy and be aware that many are being sold today.
Also, you want to buy a policy from a top company that is rated highly by the independent insurance rating services.
Finally, make sure you do business with an independent agent that represents many life insurance companies. This is really the key to getting the best deal because the more options available to you, the more underwriting negotiating. In other words, the ability to offer multiple companies will significantly improve your leverage with all insurance companies. We routinely squeeze the life insurance providers for better rates for our clients when we know that an offer is not the best that can be had. You need an advocate working on your behalf!
Second-to-die life insurance, also known as survivorship life, is a life insurance policy that insures two people most commonly a husband and wife. The primary use for last-to-die policies is estate planning. Survivorship policies work similarly to ordinary life insurance policies but do not pay out a death benefit until the second death. The chief advantages of these policies are that they are cheaper and are great for providing liquidity for illiquid estates. If you have a high net worth and are expecting to pay estate taxes, you should definitely consider second-to-die life insurance. Call MEG Financial today at (877) 583-3955 with questions or receive an instant free life insurance quote.
References and Links
* The above trust and tax information is for information purposes only and is provided to explain the general basics of irrevocable life insurance trusts and using life insurance to pay estate taxes. Any individual doing estates planning should consult with their own independent advisor that understands their particular legal and tax circumstances. This information is not intended to be tax or legal advice..