What is Second to Die Life Insurance?
What makes things even more confusing is that most types of life insurance products you hear about aren’t really insurance products, but marketing terms for how life insurance can be used.
Do any of these terms sound familiar?
- Final Expense Insurance
- Burial Insurance
- Mortgage Protection Insurance
- Key Man Insurance
They probably sound familiar because they are marketing terms but the truth of the matter is these terms represent a “purpose” for life insurance and not a “type” of life insurance.
Second to Die Life insurance represents both. It is a type of life insurance and it is a purpose for life insurance. Keep reading and we’ll do our best to make this clear and concise.
What is Second to Die Life Insurance?
A second to die life insurance policy provides insurance coverage on two people (typically married) but the death benefit is paid to the beneficiary only after the second person has died.
This arrangement is different than traditional life insurance because the surviving partner is not paid a death benefit when the spouse or other partner dies.
Normally when a married person purchases life insurance, he or she will name the spouse as a beneficiary so that the surviving spouse gets the death benefit.
But with a second to die policy, both spouses or partners are covered so that children or grandchildren will receive the death benefit after both have passed away. Why would you need this? Keep reading.
Why Buy Second to Die Life Insurance?
Most second to die life insurance policies are purchased to make certain that the estate of the insureds will transfer to the beneficiaries intact.
Typically, the death benefit in a second to die policy designed to provide funds to help the person inheriting an estate can pay any estate or inheritance taxes without having to borrow against the estate or sell off a portion of it.
An additional benefit of the second to die policy is that it generally will accumulate enough cash value so that the insureds are actually adding to the estate they wish to protect from Uncle Sam.
Another very popular reason to purchase second to die life insurance is if you and your spouse have a special needs child or children that are financially dependent on you.
Having a second to die life insurance policy will provide you and your spouse the peace of mind knowing that your special needs child would have a financial safety net if neither of you was there to provide financial support that the child or children will likely to need for the rest of their life.
Is a Second to Die Policy Cheaper than Two Separate Policies?
Yes, a second to die policy typically costs less than buying separate policies on the spouses or partners because the premiums are calculated based on the combined life expectancy of the insureds and benefits will not be paid until both have died.
It’s important to note, however, that when one spouse dies, the other will need to continue paying premiums on the policy.
With most insurance companies, the underwriting for second to die life insurance is more lenient because the policy is being issued on two lives rather that one.
Even if one spouse or partner is not very healthy, the insurer is more apt to accept the risk because they know they will continue to collect insurance premiums if the unhealthy spouse dies first.
What are the Pros and Cons of Second to Die Life Insurance?
As with any type of life insurance, there are typical pros and cons that can accompany the purchase. However, the pros and cons are generally based on what happens down the road following the purchase.
As we mentioned earlier in the article, second to die insurance policies generally cost less than have separate policies because the rate calculations are based on the mortality of two insured persons rather than one.
This results in a lower risk to the insurance company, meaning a lower cost to the insureds.
Lenient Underwriting Standards
When purchasing second to die life insurance, the underwriters tend to focus on the healthiest and youngest of the applicants.
Even if one of the applicants has previously been denied coverage because of health conditions, that person will likely not cause a second to die policy to be denied.
Also, since age is a primary factor in rate calculations, a couple can save money if one spouse is younger than the other because the insurance company will rate the policy based on the average age of the applicants.
Cash Value Accumulation
Since second-to-die policies build some cash value over time, the insureds will have a source of cash in the event of a financial emergency. Additionally, as long as funds are taken via policy loans, they will be considered tax-exempt to the policyholder.
Riders, Riders, and more Riders
Just as with traditional life insurance policies, most insurers will offer plenty of optional riders that will allow the insureds to broaden their coverage and add additional living benefits to the policy.
As we mentioned earlier, the pros and cons are generally presented after the policy has been in force for a while, especially the cons.
If the insured couple decides to split up, the insurance policy is not divided like other assets. The policy will remain in force on both insureds as long as the premium is paid. In most cases, however, if one spouse is remarried the new husband or wife is typically not too excited about laying out the money to cover the x-partner.
Depending on how long the policy has been in force, the policy can be sold and the cash divided between the divorced insureds.
The Terms of the Policy are etched in Stone
There is no wiggle room if the insured parties want to amend the death benefit or change premium payments.
This means that the applicants must consider typical life events that could cause an issue with having a second to die life insurance policy rather than separate policies that could accommodate life events if and when they happen.
The Bottom Line
If you are considering second to die life insurance, chances are that you have a large estate that you want to protect or you have a special needs child who will always depend on you financially.
In either case or some other financial risk that needs to be mitigated, it’s important that you contact an insurance professional familiar with these challenges and even an attorney to help you consider your options.