What’s a Second to Die Life Insurance Policy?

Updated

Have you ever seen a television commercial sponsored by a life insurance company advertising the benefits of a second to die life insurance policy? Probably not. You may be wondering: what is a second to die life insurance policy, and why haven’t I heard of it before? 

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If you haven’t heard of second to die life insurance (aka survivorship life) before now, don’t feel bad. You’re not alone. Survivorship life is a niche life insurance product that serves a small slice of the population, typically couples with a very high net worth or have unique needs (discussed later).

This article will delve into second to die life insurance, how it works, who it can benefit, its cost, and more. Read on—you may need this type of policy and not realize it.

What Is a Second to Die (Survivorship) Life Insurance Policy and How Does It Work?

Survivorship policies were introduced in the early 1980s following a significant change in the tax law allowing a married couple to defer the payment of estate taxes until the second spouse dies. It is usually sold as a whole life insurance, universal life insurance, or variable universal life insurance policy. The proceeds from a survivorship policy are generally paid to the beneficiary income tax-free, the same as most other life insurance policies.

The primary reason couples buy survivorship policies is to provide liquidity to pay the estate taxes when due without having to liquidate other assets (home, business, investments, etc.) to pay the tax bill.

For example, let’s say that Ron and Alice have an estate that will generate an estimated federal estate tax bill upon the second spouse's death. Ron and Alice have enough assets to pay the tax, but most of their money is tied up in real estate and a business they own.

When Ron or Alice dies, all of the assets can be transferred to the surviving spouse as the sole owner, and no taxes will be due at that time. When the second spouse dies, their estate will need to file IRS Form 706 and pay all taxes due within nine months of the second death.

Like Ron and Alice’s, the challenge with large estates is that it’s unlikely that enough of their assets could be sold within nine months to pay the taxes. Having the survivorship life insurance policy solves that problem, and the other assets can remain intact if that’s what the heirs desire or the will dictates.

Second to die life insurance is a type of joint life insurance, along with first to die life insurance. Both types of joint life policies insure two lives, hence the name.

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How Much Do Survivorship Life Insurance Policies Typically Cost?

The chart below will provide you with some approximate numbers. They assume that each spouse is a non-smoker in good health. 

The ages column in the chart represents two spouses being the same age, and the death benefit of the policy is $1 million. The guaranteed level annual premium is what must be paid to secure the death benefit. 

Some families prefer to pay the premium in a single payment. That payment will be much higher than paying annual premiums, but it guarantees that the death benefit will be paid.

The following sample survivorship life insurance quotes are based on non-smoker preferred best rate class. All rates are for educational purposes only and are not guaranteed. All life insurance rates must be qualified for.

Ages

Guaranteed Level Annual Premium

One Pay Single Premium

Death Benefit

60/60

$10,000

$200,000

$1,000,000

65/65

$13,000

$260,000

$1,000,000

70/70

$18,000

$340,000

$1,000,000

75/75

$24,000

$430,000

$1,000,000

80/80

$38,000

$580,000

$1,000,000

The above survivorship life insurance quotes from A-rated carriers and above.

Survivorship life insurance policies offer far more death benefit for lower premiums than individual life insurance policies. Life insurance companies can do this because their cost and risk are lower with a survivorship policy.

The cost referred to is the amount of money the insurer must hold in reserve to cover the outstanding death benefit, which is based on the probability that an insured will die in any given year. In the case of a second to die policy, the likelihood of both insureds dying the same year is significantly lower than the probability that one of them passes away.

Let’s compare the cost of a second-to-die policy for a 45-year-old couple compared to them each buying an individual life insurance policy. The death benefit for each of the policies is $1 million.

Required annual premium for 45-year-old male: $8,430 

Required annual premium for 45-year-old female: $7,560

Total annual premium for both individual policies: $15,990

Comparatively, a second to die policy for the same 45-year-old couple would have an annual premium of $11,129, saving the couple $4,861 per year.

What Are the Pros and Cons of Survivorship Life Insurance?

There are positives and negatives to survivorship life insurance. Here is a list of both.

Pros of survivorship life insurance

Less expensive. As explained above, survivorship policies cost less than individual life policies because the risk to the insurance company is statistically less.

Easier to qualify. Because of lower risk for the insurance company, the life insurance underwriting process is usually more lenient for survivorship policies. The insurer will usually focus on the youngest or healthiest of the spouses. 

This is particularly good news for someone that has been turned down when applying for a life insurance policy and determined to be uninsurable because of pre-existing medical conditions.

Estate security. If your estate is large enough in value to trigger an estate tax when the second spouse dies, survivorship life can provide the money to pay those taxes. 

Builds generational wealth. With some families, the adult children of a couple will buy a survivorship policy for their parents, and they will be the beneficiaries. This can create a substantial estate for each of the children. 

When receiving the death benefit, the adult child can then take a portion of the money they received and purchase a life insurance policy on themselves and make their children the beneficiary. This allows future beneficiaries to have a substantial inheritance.

Estate equality. Best explained with an example: George and his wife Nell have two children, one boy, and one girl. The boy is interested in running the family business when mom and dad are gone; the girl has no interest in the business.

To keep things equitable, George and Nell could transfer the company to their son when the second spouse dies and buy a survivorship policy with the daughter as the beneficiary for her to get a benefit equal to that of her brother.

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Cons of survivorship life insurance

No payout until second death. For many couples, life insurance is purchased to benefit the surviving spouse. With a survivorship policy, neither spouse will ever see a benefit from the premiums paid for many years; only the beneficiaries will. 

If the first spouse to die’s income was used to pay part or all of the survivorship life policy premium, the policy could end up being a financial burden to the surviving spouse. This is perhaps the number one reason that more people don’t buy second to die policies.

Marital changes. Though it may seem improbable when the policy is applied for and issued, divorce happens, and often unexpectedly. A divorced couple with a survivorship policy will have a policy that’s still in place, and the premiums will have to be paid unless they let it lapse, making it worthless to anyone.

If one person dies and the surviving ex-spouse decides to remarry, the premiums will still need to be paid. In some situations, the new spouse may not want to help pay premiums on a policy that doesn’t benefit their heirs.

Not focused on cash value. Since most survivorship policies are permanent types of policies (whole life, universal life, variable universal life), there is a cash value component that is funded by part of each premium paid. This savings element grows over time, with interest, and can be borrowed if needed.

The problem is that second to die policies’ cash value grows much slower than it does on individual permanent policies, and it's unlikely that the spouses would ever benefit from this policy feature.

It is possible to purchase term survivorship life insurance, but it lacks popularity because it is typically priced much closer to whole life insurance premiums because it is more likely to pay a death benefit and the lack of a guaranteed payout means there is additional risk to the insureds.

Who Typically Needs a Second to Die Life Insurance Policy?

Survivorship life policies are beneficial to couples with a medical condition. As clients age, it becomes much more likely statistically that at least one spouse will have a health history that precludes them from getting approved for life insurance, but second to die policy underwriting is much more favorable than individual policies because two people are being insured, not just one.

A couple with a special needs child also make excellent candidates for a survivorship policy. The child may be financially cared for while both parents are alive, but the child may not have their needs met when they've both died. A survivorship policy’s death benefit can provide the care and security the parents want for their child.

Final Thoughts

Survivorship life insurance policies serve many purposes and meet many needs. Like all life insurance policies, they provide money to someone in need financially because the insured has passed away. They have their place in some people’s insurance portfolios.

Before you decide to apply for a second to die policy, consider all of your alternatives and visit with a financial advisor or life insurance agent for guidance on whether or not a survivorship policy might make sense for you.

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