Second to die life insurance is precisely that – a policy insuring two lives that only pays out once the second insured has passed away. This coverage is typically used for estate planning and wealth transfer preparation.
Permanent insurance policies like whole and universal life are the most common types used in second to die plans. There are several advantages to policies covering two lives including cost, reliability and tax avoidance. When setup properly, these plans can help families cover future expenses in the most efficient manner.
These policies are offered by several different insurance companies and have been for many years. Most typically, a husband and wife would be the insured persons on the policy and the beneficiaries would be their children, a trust or a business interest.
Second to die life policies do not pay out when the first insured passes away. It is not until the second insured passes that the policy proceeds are available income tax-free to the beneficiaries. In this way, it is a very simple structure without a lot of moving parts.
Plans can be purchased using a single premium, but most often are funded over a set number of years or a lifetime. Some policies can grow each year depending on the underlying investments in the policy. Others would have a known, fixed benefit at death from onset.
There isn’t a one size fits all approach to second to die life insurance planning. Some owners will use whole life insurance while others will use guaranteed universal life plans. Both policy types have their advantages and disadvantages.
While whole life will typically costs more and offers more cash value, guaranteed universal life will be less expensive and offer less cash value to the insured(s). Our independent agency offers both whole and universal life and we can help you compare the two.
The premiums associated with second to die life insurance are usually less than a policy with only one insured. This is because there are two insured lives and therefore it is likely to stay in-force longer. The longer the policy is active, the less it will cost the consumer.
Some life policies are funded with yearly premiums while others are established on a set schedule (payments for ten years only for example) – still others are funded with a lump sum single premium. It depends on what the owners are wanting to accomplish with their insurance policy.
Without a doubt, there are few, if any, financial instruments that offer more tax advantages than life insurance.
This is why savvy consumers have been using life insurance policies for wealth transfer, business succession planning and to reduce state and federal estate taxes.
Life insurance proceeds are income tax free at passing. The immediate benefits created by a life policy have smaller income tax consequences for the beneficiaries upon distribution.
Additionally, when a life policy is created properly it can avoid state inheritance taxes in some states that still impose such a tax. More importantly for some high net worth families, certain life policies can help to avoid federal estate taxes as well.
The use of Irrevocable Life Insurance Trusts has grown tremendously among the wealthy as reliable means to create a federal tax-free source of funds to transfer wealth and account for other liabilities – including estate taxes.
So long as the trust is the owner of the second to die life insurance policy and the trust is also the beneficiary, then the proceeds may not be included as part of the taxable estate. These types of trusts (abbreviated as ILIT’s) are usually established with the help of estate planning attorneys.
As referenced in the name, these estate planning vehicles are typically irrevocable. Once created and funded with a second to die life insurance policy – the insured (i.e. premium payor) has little access to the funds. There is quite a bit more that goes into the creation of ILIT’s, but second to die life policies are often the plan of choice.
We are an independent life insurance agency specializing in wealth transfer and estate planning strategies. Contact us today to compare illustrations and to learn more about the second to die life insurance policies that might best fit your needs.
Category: Life Insurance