Second To Die Life Insurance Eases Estate Tax Burden
The majority of life insurance policies are written on the life of only one individual, though policies that are written on the life of two or more individuals are growing in popularity. This type of policy is often called second to die life insurance. Second to die life insurance has been used to close substantial estate tax problems affecting some of the more affluent elderly couples.
The typical life insurance policy is technically called single life insurance, where the insurance policy is written on a single life. In the case where the policy is based on multiple lives, the policy is either called survivorship life insurance or second to die life insurance. Granted, if a policy is written on more than two lives, the term survivorship is used rather than second to die.
Another alternative to this type of joint life insurance policy, albeit less common than the other two types, is first to die life insurance. First to die life insurance policies are written on multiple lives, and pay out the required death benefit upon the death of the first covered policy owner. The practical purposes for this type of policy arrangement are almost primarily restricted to business planning applications. This has been used as a way to fund buy-sell agreements, allowing the company to protect itself upon the first death of one of the primary owners of a company.
As we stated before, in a second to die life insurance policy the coverage is on the life of two different individuals. The death benefit of the policy is payable upon the death of the second covered person to die. The policy remains in effect through the first death, and is executed upon the second death. The most common use of second to die life insurance policies is in estate planning applications.
A common trap that many couples were facing in regards to the estate tax dealt with single life insurance policies. The couple would cover the lives of either or both spouse(s) and then receive the death benefit upon the death of the first spouse. As with any life insurance death benefit payout, the payment is income tax free to the beneficiary.
For many individuals this type of coverage was designed to provide income and support for the surviving spouse. In the case of some of the wealthier couples however, it only adds to an increasingly burdensome estate planning problem. The surviving spouse in these cases is not in need of the death benefit to sustain their lifestyle. The death benefit only adds to the size of the estate upon their subsequent death.
Second to die life insurance provides a way to defer the disbursement of the first spouse’s death benefit until after the surviving spouse passes. This keeps the death benefit out of the grasp of the estate tax and into the hands of the beneficiaries and heirs. Comparing second to die life insurance quotes to the cost of multiple single life insurance quotes, the couple will also see a sizable cost savings in premium payments.
Another common practice is to use a second to die life insurance trust, or simply using second to die life insurance to fund a trust. This practice has been used to fund various charitable or family trusts upon the death of the benefactor couple.
Second to die coverage has provided those couples with complicated estate planning issues an additional way to plan for their pending estate tax bill. And while this is one of the more common applications of second to die life insurance, it is certainly not the only possibility. Finding a good financial planner will allow you to apply advanced life insurance applications to almost any comprehensive retirement, savings, estate, or tax plan.
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