Second-to-die insurance pays out only after both you and your spouse have died. It is ideally designed to provide liquidity to pay estate taxes and has other advantages over insurance on a single life.

Second-To-Die Advantages

Premiums are lower. Because the insurance company normally has the use of the funds for a longer period before paying the same death benefit, it generally can charge a lower premium.

Estate administrative costs are lower. With a single life policy, you have to estab­lish a separate trust to administer the funds if the insured dies first, even though the funds may not be currently needed by the family.

Uninsurable parties can be covered. This is because the life expectancy of any two peo­ple is longer than that of just one. Depending on the uninsurable party’s age and health, however, the premium may not be much lower than on the insurable party’s
life alone.

Funds will be available to pay estate taxes. If cash is not needed on the first death, when no tax generally is due, insurance pro­ceeds on the second death ensure availability of funds to pay taxes.

Questions To Ask About a Policy

Can the insurance premiums fluctuate depending on investment performance? If so, ask your advisor for projections of pre­miums and cash values based on three differ­ent rates: currently projected rates, minimum guaran­teed rate, and midway between the current rates and the minimum guarantees. This will give you an idea of the volatility of the policy.

Is the insurance company projecting improvement in mortality? If so, is that taken into account in projecting premiums? Overly optimistic projections can affect future premium payments.

Does the premium or cash value change   when the first insured dies? The insurance company’s risk increases significantly when only one life is insured. Many projections are appli­cable only when both insureds are alive, so compute new projections assuming only one insured is alive.

How Should You Own It?

Without proper planning, life insurance pro­ceeds can be subject to estate taxes on your death. The general rule is that if you had any “incidents of ownership” in the policy, the proceeds will be taxed in your estate.

With second-to-die insurance, you and your spouse might each have incidents of owner­ship in the policy, and the value of the policy will be included in both estates. While there may be no tax consequence on the death of the first spouse, the inclusion of the policy in the surviving spouse’s estate could defeat
the purpose of purchasing second-to-die insurance.

An effective way to make sure life insurance is not taxed in either your or your spouse’s estate is to put it into an irrevocable life insur­ance trust.

Would Second-To-Die Insurance Benefit Your Estate Plan?