What is “second to die” life insurance, and how does it work?
Second to die or survivorship life insurance is ideal for anyone who needs to establish a trust, protect an estate, or leave an inheritance behind tax-free. If you have a large estate or business, a child with special needs, or if you want to leave a large inheritance behind; second to die life insurance may be ideal for your situation.
In this quick guide, we’ll explained the basics of second to die insurance, and we’ve provided some situations where second to die insurance may be your best option.
Quick Article Guide:
1. What is Second to Die Life Insurance?
2. Other Benefits of Survivorship or Second to Die Life Insurance
3. Avoiding or Reducing Estate Taxes
4. How Do I Create an Irrevocable Life Insurance Trust?
5. Common Pitfalls to Avoid When Setting Up a Trust
6. Using Second to Die Life Insurance to Divide the Proceeds of Your Estate
7. Using Second to Die Insurance to Fund A Special Needs Trust
8. Using Life Insurance to Leave Money to A Charity
9. We Can Help You Compare Your Options
What is Second to Die Life Insurance?
Most life insurance policies are “first to die”. They insure an individual’s life, and when that individual passes away, their beneficiary receives the insurance policy’s death benefit.
With second to die life insurance, two people are insured, and the life insurance policy does not pay a death benefit until both insured people pass away. Second to die policies can be purchased by a married couple, business partners, domestic partners, a father and a son, or a wife and a daughter.
One of the many benefits of second to die or survivorship policies is that they are usually less expensive than purchasing two individual life insurance policies. In addition, the life insurance companies that specialize with these policies offer more liberal underwriting guidelines than a life insurance policy for an individual.
Rather than insuring one person, a second to die policy does not a pay a death claim until both individuals pass away, which spreads the insurance company’s risk between both applicants. We’ve even seen companies approve a second to die policy when one of the applicants was previously “declined” by another life insurance company!
Other Benefits of Survivorship or Second to Die Life Insurance
Survivorship policies can also include a “spendthrift clause”, which prevents the beneficiary of the policy from spending the policy’s death benefit too quickly. This is especially helpful for parents who want to protect their special needs child or a financially irresponsible/younger child.
The trustees of these policies, or the trustee of your irrevocable trust, will also have the option to make systematic payments to your beneficiary like an annuity, rather than providing them with one large lump sum of cash all at once. If a child/heir is a poor money manager, this may prevent them from overspending. In addition, their creditors will be unable to touch the money in the trust.
The trustee you appoint can even pay your beneficiary’s rent and bills directly, without the creditors or others having access to monetary assets. This scenario provides many parents peace of mind, knowing their child will continue to have their basic needs met, with little financial risk after their gone.
Second to die life insurance is not ideal for most situations, especially if your spouse or family is reliant on your income. However, second to die insurance may be ideal for establishing a trust, leaving an inheritance, equally dividing an estate between your children, leaving money to a charity, or reducing estate taxes.
In the next section, we’ve explained how life insurance can be used to preserve your legacy for future generations.
Avoiding or Reducing Estate Taxes
Second to die insurance is often purchased by married couples for estate planning purposes. The IRS has limits on the amount of assets that you transfer or gift to family members un-taxed when you pass away. These limits are also known as estate tax exemptions.
As of 2018, the estate tax exemption was set at $22.4 for married couples, and $11.2 million for individuals.
What does this mean?
If your estate is worth less than $11.2 million, your loved one’s won’t have to worry about the IRS or federal estate taxes, but you may want to create a trust for other reasons like leaving an inheritance behind, or planning for state inheritance taxes.
When calculating the value of an estate, the IRS will consider: all the life insurance, investments, property, mineral rights, jewelry, savings accounts, stocks, collectibles, etc. that you and your spouse collectively own. If your estate’s value does not exceed the current federal estate tax exemption of $22.4 million ($11.2 million for individuals), your heirs probably won’t encounter any federal estate tax issues.
But, if your combined estate is worth more than $22.4 million, any assets that exceed this value will be subject to a tax rate of 40%. You can temporarily avoid estate taxes by transferring your share of the estate and your estate tax exemption to your spouse when you pass away.
However, when your spouse passes away, if the assets left behind are valued at more than federal estate tax exemption of $22.4 million, your heirs will be subject to a 40% tax rate on the value of your estate that exceeds the exemption. These taxes must be paid within 9 months of your spouse’s passing, or IRS can seize the assets you intended to leave behind.
To raise money and avoid property seizure, surviving family members often hold estate sales to sell hard-earned assets, often for a fraction of their value. To avoid this scenario and ensure that their legacy is passed-on, many people establish a trust.
Also known as an irrevocable life insurance trust, these policies are typically funded with second to die policy, or a permanent insurance policy for an individual like guaranteed universal life.
How Do I Create An Irrevocable Life Insurance Trust?
In the IRS’ eyes, life insurance is an asset, but for 99% of Americans this is a non-issue. The death benefit from a life insurance policy is usually untaxed because the assets left behind by the deceased seldom exceed federal estate tax exemption, currently set at $11.2-22.4 million, depending on the deceased marital status.
If you’re married and the total value of your assets exceeds the current estate tax exemption of $22.4 million (if you’re single, this number is reduced to $11.2 million), you need set to up an irrevocable life insurance trust, or ILIT.
An ILIT will separate your life insurance policy’s death benefit from your estate. According to the IRS, any assets that are under your control at the time of your death are a part of your estate, and they will be subject to estate taxes.
To avoid this scenario and prevent your life insurance from becoming a personal asset, an irrevocable life insurance trust can be created to become the “Owner” and “Payer” of your life insurance policy. You and your spouse may then “gift” your trust up to $14,000 each per year, untaxed, as your annual exclusion. In-turn, the trust can use this money to finance your life insurance policy’s premiums.
| Year | Estate Tax Exemption - Individual | Estate Tax Exemption - Married | Federal Estate Tax | Annual Gift Exclusion |
|---|---|---|---|---|
| 2018 | $11.20 Million | $22.40 Million | 40% | $14,000 |
| 2017 | $5.49 Million | $10.98 Million | 40% | $14,000 |
| 2016 | $5.45 Million | $10.90 Million | 40% | $14,000 |
| 2015 | $5.43 Million | $10.86 Million | 40% | $14,000 |
| 2014 | $5.34 Million | $10.68 Million | 40% | $14,000 |
| 2013 | $5.25 Million | $10.50 Million | 40% | $14,000 |
| 2012 | $5.12 Million | $10.24 Million | 35% | $13,000 |
| 2011 | $5.00 Million | $10.00 Million | 35% | $13,000 |
When you both pass way, your second to die insurance policy will pay the death benefit to your trust, and in-turn, your trustee can use this money to settle any estate taxes that are owed to the state or IRS. This prevents your heirs from selling assets, or being forced to settle with the IRS. Trusts may also be created for a variety of other reasons like establishing a special needs trust, or leaving money behind to a charity. We’ve explained a few of these strategies, and what common mistakes to avoid below.
Sound confusing? Don’t worry, we can walk you and your tax professional or attorney through the process. We’ve helped thousands of people throughout our 50+ years of collective experience and we can help you too.
Our licensed life insurance specialists will provide you with a free consultation and accurate quotes to help you determine your options. As an independent no-cost brokerage, we only represent life insurance carriers that are A-rated by AM Best, and our services are 100% free.
Common Pitfalls to Avoid When Establishing a Trust
Most trust attorneys and financial advisers recommend creating an Irrevocable Life Insurance Trust or “ILIT” to both fund (pay your policy) and to serve as the beneficiary of your second to die or survivorship policy. As we mentioned before, an irrevocable life insurance trust or “ILIT” is separate from your estate, and it controlled by a trust/trustee.
When establishing a life insurance trust, make sure you avoid these common pitfalls:
1. Establish an Irrevocable Trust
A revocable trust allows the trust’s grantor or establisher to maintain direct control of assets within the trust. The IRS considers any asset that is under your control to be part of your estate, making the death benefit from your policy subject to federal estate taxes. If your estate is valued at less than $11.2 million, a revocable trust may serve your needs better, but to avoid estate taxes for your loved ones, you need to establish an irrevocable trust.
The downside to an irrevocable trust is that it cannot be altered once it is created. The trustee you appoint will manage the trust in accordance to the terms by which is was created, and for IRS purposes, this is enough for your surviving family members to avoid estate taxes.
After you decide on the terms of your trust, you can appoint your own trustee who will carry out your wishes. This will allow you to decide where your money ultimately ends up, and will provide you with some control of your trust, even when you are gone.
A trustee can be a bank executive, a trust or estate attorney, or a family member. This person must act in accordance to the terms of the trust, but we only recommend appointing a family member who is financially responsible. If your situation changes and you wish to cancel the insurance, you’ll also have the flexibility to stop funding the trust allowing your insurance policy to cancel with no penalties or fees.
2. DO NOT Fund Your Trust with Term Life Insurance
Term life insurance is a great option for most families because it provides affordable coverage for parents during their income earning years. Term life insurance policies are not designed to provide lifetime coverage though. Most term insurance policies are affordable because they are usually outlived. In fact, most of the term insurance policies on the market expire before age 80.
If you need to fund a trust, or leave money behind when you pass away, make sure you buy a policy that won’t expire before you. Second to die insurance and guaranteed universal life insurance policies are ideal for funding a trust because they’re designed to provide affordable lifetime coverage without requiring an investment. There is no risk, and if the premiums are paid on time, the policy will provide a death benefit to your loved ones.
3. Buying A Policy That is Too Expensive
With second to die insurance, the insurance premiums need to be paid until both insured people pass away. If your surviving spouse will not have enough income to pay your insurance premiums, you may want to consider less coverage, or a first to die policy instead.
Individual lifetime insurance policies can provide a surviving spouse with the money they would need to pay for final expenses, monthly bills, or premiums on a second to die insurance policy.
Affordable lifetime policies for individuals, known as guaranteed universal life or “GULs”, offer fixed rates and coverage until the age of 90, 95, 100, 105, 110, or 120.
These policies do not require an investment value and they work just like term insurance. Your rates and coverage are guaranteed to remain level for a set period of time.
Level Rates and Coverage to Age 90 or Later – Female
| Age | $100,000 | $250,000 | $500,000 | $750,000 | $1,000,000 |
|---|---|---|---|---|---|
| 20 | $24.65 | $58.00 | $106.00 | $153.00 | $193.00 |
| 30 | $37.08 | $82.00 | $152.00 | $222.00 | $287.00 |
| 40 | $51.96 | $117.68 | $224.15 | $336.23 | $427.90 |
| 50 | $79.40 | $183.63 | $354.55 | $531.83 | $680.00 |
| 60 | $130.66 | $301.08 | $575.95 | $863.93 | $1,104.40 |
| 70 | $218.05 | $545.12 | $1,068.45 | $1,602.68 | $2,061.80 |
| 80 | $507.77 | $1,191.90 | $2,318.05 | $3,477.08 | $4,503.60 |
*Displayed quotes are accurate as of 10/01/2017 and are provided for illustrative purposes only.
Level Rates and Coverage to Age 90 or Later – Male
| Age | $100,000 | $250,000 | $500,000 | $750,000 | $1,000,000 |
|---|---|---|---|---|---|
| 20 | $24.65 | $58.00 | $106.00 | $153.00 | $193.00 |
| 30 | $37.08 | $82.00 | $152.00 | $222.00 | $287.00 |
| 40 | $51.96 | $117.68 | $224.15 | $336.23 | $427.90 |
| 50 | $79.40 | $183.63 | $354.55 | $531.83 | $680.00 |
| 60 | $130.66 | $301.08 | $575.95 | $863.93 | $1,104.40 |
| 70 | $218.05 | $545.12 | $1,068.45 | $1,602.68 | $2,061.80 |
| 80 | $507.77 | $1,191.90 | $2,318.05 | $3,477.08 | $4,503.60 |
*Displayed quotes are accurate as of 10/01/2017 and are provided for illustrative purposes only.
4. Buying A Policy that Promises to Build a Cash Value
Your life insurance should never be tied to an investment. Investments are not guaranteed, and life insurance is a lousy investment vehicle. Any potential gains are usually offset by expensive management fees, and an adjustable cost of insurance that rapidly increases as you age. In addition, the cash value accumulated in your policy is never really your money, it’s there to pay for future premiums.
If you borrow from your policy’s cash value, your death benefit will be reduced until you’ve pay back the loan WITH interest. And with traditional universal life insurance, the “cash value” in insurance your policy is not paid out to your beneficiaries, it’s kept by the insurance company.
Don’t just take our word for it, read the Forbes article, “Retirement Disaster Looms For Universal Life Policyholders”.
Your life insurance coverage should be guaranteed. There is no reason to overpay for coverage and gamble with your family’s financial future. The only type of universal life insurance coverage that you should ever consider is guaranteed universal life insurance. These policies do not build cash value, they do not require an investment, and they are guaranteed.
The cost of your life insurance policy and your death benefit can be guaranteed until the age of 90, 95, 100, 105, 110, or 120, depending on your life expectancy. Read more about Guaranteed Universal Life Insurance here.
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Using Second to Die Life Insurance to Divide the Proceeds of Your Estate
Aside from providing funds to pay off any estate taxes, second to die life insurance policies can also be used to equalize your estate, or equally divide the assets you intend to leave behind to your children.
Let’s assume you own a successful law practice and have two children. One is attending law school, with the plan of working with you and slowly taking over the practice as you get closer to retirement.
Your other child is an aspiring dancer and wants nothing to do with the law practice. Rather than splitting your firm between the two children, you can purchase second to die insurance or lifetime coverage to equalize your inheritance. Leave your “lawyer to be” child your practice, and your aspiring dancer a lump sum of cash from your policy to help them finance their first dance studio.
Using Second to Die Insurance To Fund A Special Needs Trust
When you and your spouse are gone, who will take care of your special needs child? Second to die insurance policies are often purchased to provide funding for a special needs trust.
A special needs trust allows you to supplement your child’s lifestyle and provide for their living expenses when you are gone, without affecting their eligibility for government benefits.
These trusts can be funded with second to die life insurance, or individual coverage depending on each parent’s health, and their ability to provide adequate care. To learn more about purchasing life insurance to establish a special needs trust, please call to speak with one of our experienced agents: 855-902-6494
Using Second to Die Insurance to Leave Money to a Charity
Some of our clients purchase life insurance to fund a “wealth replacement” trust. With a wealth replacement trust, an irrevocable life insurance trust is established at the time the second to die life insurance policy or permanent policy is purchased.
The trust will insure that your children receive the death benefit from your life insurance policy tax-free, and all your property and non-liquid assets are donated to the charity of your choice. Your children can then use the money your policy provides to start a business, buy a house, invest, continue their education, etc.
We Can Help You Compare Your Options
Purchasing life insurance may seem like an overwhelming process, especially when you consider all options. There are hundreds of companies competing for your business, and thousands of coverage options available. To further complicate things, each company has their own pricing, health risk rating system, and qualification guidelines.
This is where Term Life Advice can help you save time, money, and confusion. As an independent agency, we can impartially shop more than 60 top-rated life insurance companies to match you with the life insurance companies that are the best for your age, health, family history, gender, etc.
Our agency is fully-licensed in every state, our agents offer multiple years of experience, and our comparative shopping services are completely free.
Most importantly, buying your life insurance through an independent agency like ourselves is exactly the same price as buying your policy from the insurance company themselves. Life insurance rates are heavily regulated, and agencies cannot charge a fee for their shopping services.
As an owner-operated company, our agents do not have daily sales goals or quotas to meet. Your satisfaction is our only “quota” and we’re here to answer all your questions. Give us a call today for your free assessment and quotes, toll-free: 855-902-6494. Or you can request a free quote online below to instantly compare rates from dozens of leading insurers.
Great article. Thanks
Thank you Mr. Welch. If you have any questions about second to die life insurance, or if you’d like to speak with one of our agents, please give us a call toll-free at: 855-902-6494.
Our shopping services are free, and we are licensed to sell life insurance in every state.
Awesome article on survivorship life insurance. With changes in the estate taxes people should consider a second to die life policy policy to increase the value of their estate, give money to charity, or create an estate for child with special needs. Best of luck in the new year!