Second-to-die life insurance represents a less common policy structure that pays a tax-free death benefit when the second insured spouse passes away. Unlike regular individual life insurance plans which cover one person, these joint policies provide couples with pooled coverage by combining both husband and wife on a single contract.
Let’s dive deeper into the central pros and cons of second to die life insurance of this less common life insurance product to determine if there is value in including it within your overall financial portfolio as part of legacy, tax efficiency, and risk management planning.
Table of Contents
The Pros of Second-to-Die Life Insurance
Potentially Lower Premiums
The biggest attraction point of second-to-die insurance policies for married couples is the potential for favorable lower monthly premium costs compared to carrying two separate individual life insurance plans (one per spouse).
Insurers can offer more attractive premium rates when policy payout is contingent on two currently younger and ostensibly healthier insureds passing away first before the disbursement trigger date. The monthly amount couples pay in is priced based on the mortality rate of the second spouse in the pairing projected to die rather than the first. This emphasis on dual longevity over individual longevity translates into significant long-term savings.
Access to Higher Death Benefits
In addition to cost savings, the joint mortality design also allows couples to qualify for higher aggregated death benefits than if each spouse applied for coverage separately. Insurers are generally willing to approve larger total coverage amounts for a second-to-die policy if the younger spouse of the two meets normal health benchmarks for their age.
For instance, a 60 year-old husband with emerging health issues may individually only qualify for a $200,000 approval if he applied solo. Meanwhile his 55 year-old wife in excellent physical shape might qualify for up to $1 million based on her personal morbidity risk evaluation. Yet together as a couple via second-to-die insurance, they could receive insurer approval for $2 million or more in pooled benefits by leveraging the wife’s clean medical history – an amount neither could amass individually.
Ideal for Estate Planning Needs
Perhaps the greatest utility of second-to-die insurance lies in its unique suitability for helping married couples meet diverse estate planning objectives later in retirement, such as:
Passing a larger tax-free inheritance to children without erosion from estate taxes
Funding trusts designated to care for heirs with special needs
Underwriting substantial charitable donations as part of a values-based legacy
Bankrolling large capital business transitions to family members upon the second death
Equalizing asset distribution to children from an earlier marriage after the second spouse dies
The six-figure tax-free death benefit payout guaranteed by these policies can provide necessary liquidity to cover hefty estate tax bills so children and organizations named as beneficiaries receive more of a couple’s hard-earned overall assets. Proceeds can also help balance inheritances across families in case of remarriages or sustain causes important to you. Such estate planning applications make second-to-die insurance a versatile option for particular situations.
Considers Both Spouses’ Needs
Second-to-die coverage also holds appeal for how it delivers joint financial protection to married couples rather than just covering individuals. Some committed partners prefer this unified insurance approach that considers the interdependent needs of both spouses as a household unit.
These couples want to conduct joint planning for retirement cash flow, future debt payments, childcare/child-rearing costs, and other shared expenses under one financial umbrella. They see their money obligations and standard of living as pooled. So this product aligns well by covering the eventual dual loss of income over time. It accounts for the financial determinants when both nurturers, partners, income providers, and caretakers die.
Cash Value Growth Potential
Certain forms of second-to-die insurance also have cash value components allowing policy savings to grow on a tax-deferred basis if funded vigilantly over time. Over decades of maintained payments, the policy accumulates an accessible monetary amount that the couple can take loans out against or withdraw/surrender during later years if supplemental retirement income or emergency money is ever needed.
Having this kind of back-up policy cash value longevity insurance features similar to annuities or permanent life products adds an extra degree of useful flexibility for insureds later in life. However, it requires diligently over-funding premiums in the present to realize this benefit.
The Cons of Second-to-Die Life Insurance
No Immediate Individual Death Benefit
The main inherent drawback of second-to-die structured policies is that they do not pay out any accessible death benefit or insurance settlement immediately upon the first spouse’s passing. Surviving partners are left without supportive policy proceeds to cover funeral and hospital bills, outstanding debts or medical costs of their deceased partner, or income continuity if one salary gets erased.
The policy only pays beneficiaries if the second partner dies after some predefined exclusion period (typically 60-180 days after the first death). For comprehensive protection, the couple must additionally buy first-to-die insurance coverage too in order for earlier support upon the first death event. This necessitates paying premiums on two different overlapping policies to have all bases covered – adding to cumulative long-term costs.
More Benefit Uncertainty
By only paying upon dual mortality, there is also greater uncertainty whether second-to-die insurance benefits will ever get paid out at all to covered families in the distant future. Both insured spouses must first pass away within a condensed period for heirs to receive anything.
If one partner lives healthily well into elder age, the payout could be so postponed or improbable that heirs see no money until much later in their own lives. Or potentially no death benefit gets realized for decades as premiums wash out – making the investment feel somewhat “wasted” over so many years without return.
Meanwhile, a couples’ living needs, tax situation, estate laws, etc can shift markedly over such long durations in ways that make earlier coverage levels & structures suboptimal later on. So having less control over precise timing and changing personal environments adds troubling uncertainty.
Limited Carrier Options
Second-to-die insurance still occupies a niche status at present, accounting for less than 2% of all life insurance purchases industry-wide. Hence only about a third of insurers actively offer this kind of joint policy. So shopping around to compare rates, reviews, financial stability grades, and unique product features gets much harder for consumers.
With fewer big-name carriers and boutique players in the game, couples may pay more in long-run premium costs due to dampened market competition and innovation. Discovering the optimal second-to-die product fit for your situation requires significant due diligence digging into arcane options.
Asset Specificity Risk
While the death benefit dollar amount guaranteed by second-to-die policies is clearly defined upfront, the actual real future spending power of a payout decades later is vulnerable to the eroding effects of inflation over such long time horizons.
For example, today’s $1 million coverage will likely buy beneficiaries far less in tangible goods, services, and lifestyle needs beyond 30+ years of rising prices later. So without proper inflation protection provisions built into the original policy, the terminal payouts to heirs may underdeliver on purchasing power or estate goals initially envisioned years earlier.
Does Not Bypass Probate
While death benefits from these policies do avoid income taxes, second-to-die insurance proceeds must still transfer through the detailed estate settlement process after both insureds pass away. This means court procedures to appraise assets, validate any existing wills, satisfy outstanding debts, and authorize final distribution of funds fully applies.
Heirs will likely contend with some legal delays, paperwork hassles, creditor disputes, and court fees mandated by state probate laws before inheriting their share of proceeds. So unlike other accounts with designated beneficiaries like IRAs or pensions, these policy payouts offer no shortcuts around procedural estate administration after insureds die.
Should You Consider Second-to-Die Insurance?
There are certainly valid reasons why second-to-die life insurance occupies such a slim niche, making up less than 2% of policies sold in America currently. The atypical structure does not well serve most average households’ basic income protection or debt coverage safety net needs they prioritize through their 30s to 50s. Other products like term or whole life plans better address those concerns for individuals and partners.
However, second-to-die policies can strategically solve specialized financial issues uniquely faced by higher net worth married couples in a narrow demographic. Such couples with estate planning needs exceed $5 million+ in joint assets.
For instance, second-to-die insurance works best and merits consideration for 60+ year-old couples who:
- Want to substantially cover future estate taxes so children inherit more
- Have retirement income streams secured but need more cash liquidity later
- Hope to equalize inheritances across multi-children families through remarriages
- See value in making large tax-free philanthropic transfers contingent on the dual deaths
Of course even for those in that target estate planning niche, there are various alternatives and individual factors to carefully weigh before moving forward. Every family’s financial situation and goals differ – so what’s right for your friends may not suit your distinct needs.
Conclusion
Before making any long-range decisions, have in-depth discussions with a trustworthy independent insurance advisor and estate planning legal expert. Verify whether fitting second-to-die insurance into your overall financial picture and legacy approach truly makes the most prudent sense for furthering your family’s best interests over the coming years and decades. A bit of extra diligence now is wise and warranted when evaluating sizable coverage commitments spanning such lengthy multi-decade time horizons ahead.
