What Is Second To Die Insurance And Why Is It Important?

What Is Second To Die Insurance And Why Is It Important?

Many married couples get life insurance to provide financial security for their spouse in the event of their death. However, some overlook an important type of life insurance called second to die or survivorship insurance. This type of insurance pays a death benefit when the second spouse passes away. It can be an essential part of estate and retirement planning for couples looking to maximize assets for their heirs or charitable causes. In this blog, we’ll explore why we should buy second to die insurance here and why it’s worth considering.

How Does Second to Die Insurance Work? 

Second to die insurance, also called survivorship or joint life insurance, is a unique policy that insures two people (usually spouses or partners) and pays out a death benefit when the second insured individual dies. It's designed specifically for estate planning goals to financially cover the surviving spouse after both incomes expire.

Let's take a deeper look at how these joint life policies function and the pros and cons of second to die insurance.

Ins and Outs of Second to Die Insurance

As the name suggests, second to die insurance pays a lump-sum death benefit after the second person named on the policy passes away. Both insureds are typically married spouses or partners of comparable age. The younger age of the two applicants determines premium pricing since death payout can’t occur until they also pass later in life.

This inherent structure gives second to die coverage unique advantages over regular life insurance on just one individual:

Lower Premiums: Premium costs are significantly lower compared to two individual policies because payout is deferred into later decades when mortality rates rise. This allows death benefits to compound over many years for much less annual input.

Cash Accumulation: Joint policies are usually permanent life insurance like whole life or variable universal life. This means cash value accumulates tax-deferred in addition to the death benefit. Cash balance loans can provide living income if needed in later years.

Estate Planning Uses: Death benefits that pass tax-free to beneficiaries continue providing for surviving dependents or facilitate wealth transfers to the next generation. They can also help offset estate taxes due at the second death.

Spousal Age Differential: Because premiums are based on the younger age of both insured spouses, the older individual's likely shorter lifespan provides cost savings that reduce annual outlays.

Pros and Cons to Consider

Second to die insurance certainly provides unique estate planning and spousal protection benefits when structured strategically. However, some downsides exist as well. Here are some key pros and cons to discuss with financial advisors when weighing how useful a joint policy may prove given your family's financial situation:

Pros

• Affordable lifelong coverage

• Builds permanent asset & income value

• Funds surviving spouse's retirement

• Distributes estate wealth efficiently

• Offsets estate taxes at second death

Cons

• No payout if deaths are simultaneous

• No individual personal protection

• Premiums may still be costly for some

• Limited control if marital status changes

• Delays access to death benefit

How Much Coverage is Appropriate?

Ideal second to die insurance death benefit amounts correlate directly with a couple’s financial goals once the second partner dies and retirement investments fully transition to sustaining income for the surviving spouse.

Look at projections of social security payments, retirement plan withdrawals and other income streams in the sole name of the projected survivor. Then calculate estimated taxes and living expenses annually. The gap is where second to die coverage fits in—bridging the deficit between sustainable income and necessary costs in the later years of life after one spouse has passed.

Of course, personal risk tolerance, budget parameters, existing assets and projected estate value also weigh on arriving at an appropriate joint policy death benefit. But this basic income replacement analysis quantifies a target number to discuss with financial advisors. Like any life insurance, aim for death benefits that comfortably exceed minimum necessary amounts without overspending on excessive coverage simply for the sake of large numbers. Find the right balance through prudent analysis.

Benefits of Buying Second to Die Insurance

Benefits of Buying Second to Die Insurance

There are several advantages unique to this type of shared policy:

Pay Less in Premiums

As previously mentioned, premiums costs tend to be lower for second to die policies because insurance companies consider mortality rates of both people. As both spouses age within the policy term length, rates rise. However insurers charge less than if two separate life insurance plans were taken out individually. For this reason, second-to-die policies are more affordable, making it possible for middle and upper middle class households to secure ample life insurance protection they may otherwise not budget for through individual policies.

Access Cash Quickly When Needed

Second-to-die policies provide funds that bypass probate and offer immediate access to cash upon the death of the second spouse. Because money is not tied up in the length probate process, insurance benefits are available as soon as a claim is filed to quickly take care of paying outstanding debts, taxes, medical bills and other final expenses without delays. This prevents surviving family members from the pressure and time constraints of liquidating assets on a short timeline.

Prevent Forced Sale of Assets

Similarly, this quick access to cash means that real estate, investments or personal property of value would not require distress selling upon the death of a spouse to cover financial obligations. With ample insurance proceeds available, estate executors can make financial decisions from a more neutral position rather than under duress or time pressure. This maintains future financial options for beneficiaries inheriting estate assets.

4. Funding Retirement or Charities

Some couples consider second to die insurance as a way to create an inheritance for children or grandchildren. Meanwhile, others specifically designate all or part of the death benefit funds towards supporting favorite charitable causes or non-profit organizations. These legacy decisions help direct policy proceeds in line with values and financial priorities beyond just recuperating estate taxes. 

Whether funding college savings for young grandchildren, seeding a private foundation focused on meaningful work, or simply gifting each offspring an equal portion outright, policyowners enjoy flexibility to customize survivor benefits. Sizable lump sums from second to die policies also make excellent charitable gifts to churches, hospitals, scholarship vehicles or donor advised funds without decreasing estate values for individual beneficiaries. Defining these intentions upfront provides clarity on optimal death benefit parameters and informs premium funding strategies over time.. 

5. Cash to Cover Final Expenses

Despite the best retirement planning, medical bills, funeral arrangements, debts or taxes can take a heavy toll at the end of life. The insurance funds provide cash in a lump sum that helps ease this financial burden for surviving family members. Often the logistics of handling estate issues distract from properly grieving loved ones. 

However, second to die benefits arriving quickly without probate delays facilitate covering urgent expenses, paying off final medical debts or outstanding loans and creating breathing room for beneficiaries to process grief without the fiscal pressures. Covering Medicare spend-downs that may have depleted savings in the final years also offers welcome relief for survivors. Having these unalterable costs accounted for in advance helps ensure financial peace of mind through such transitions for spouses and heirs. Just the ability to opt for simpler funerals without money issues overriding honoring life legacies provides comfort to bereaved.

The tangibility of immediate funds directed at resolving urgent estate obligations enhances coping capacity for those confronting loss. Benefits lining up support structures in advance of need fulfills key emotional and functional roles.

Factors to Consider Before Buying Second to Die Insurance

There are a few key considerations when exploring this option:

• Age and health status, which impact eligibility and premium costs

• Total value of assets and estate tax exposure 

• Income needs of surviving spouse 

• Who the beneficiaries will be – heirs, charities, etc

• How payout will align with retirement vision or legacy goals

Conclusion

While buying second to die insurance may not suit every couple’s situation, it’s worth a conversation to examine if it could enhance financial plans. Understanding the benefits and how it works empowers couples to make informed decisions about protecting shared assets and income for that difficult time when both spouses have passed. 

Most married partners naturally gravitate toward protecting their family, whether current dependents or the next generation of heirs who will survive them. Discussing practical matters of estate taxes, debts and final expenses may feel unpleasant but ultimately expresses deep care. Integrating an asset like joint life insurance helps implement that care with wisdom. 

As with any insurance, no one hopes the benefits become necessary anytime soon. But past generations plant seeds of support for their legacy to grow in seasons beyond their lifespan. Making prudent financial moves today pays dividends for beneficiaries tomorrow.