How Parents Make Sure Their Children Aren't Burdened After They Are Gone

Many Americans worry about what will happen to their heirs when they die. They fear their children may have to sell inherited property to pay off what can sometimes be expensive estate taxes at the time of their death. Most people address this concern by purchasing life insurance products.

According to survey data collected by the London International Insurance and Reinsurance Market Association, when people consider their own death, their main fears include:

• Losing money on my investments

• Burdening dependents if I die prematurely

• Leaving an inheritance for my heirs

• Paying for a child's schooling or college

The survey also found the top reasons for owning life insurance in the United States in 2015 were:

• To transfer wealth or leave an inheritance

• To pay for estate taxes or create estate liquidity

• As a tax-advantaged way to save and invest

You may want a life insurance product that offers all three of these features, which is why you should consider a second-to-die policy.

What Can Second-to-Die Life Insurance Do for Your Family?

Generally, second-to-die insurance is used for estate planning. It is a type of cost-effective life insurance on two people that provides benefits to the heirs only after both spouses die. This differs from regular life insurance in that the surviving partner doesn’t receive any benefits after their spouse dies.

People who take out this type of insurance are thinking of their heirs, not themselves. For example, it could be designed to pay estate taxes or support any surviving children. It is also called dual-life insurance and survivorship insurance.

These policies cover two or more people for less money than two individual policies would cost. For even more cost flexibility, you can choose to have a joint policy issued as term coverage, or you can choose the protection and cash value accrual of a permanent policy.

Commonly, the death benefit from a survivorship life insurance policy is calculated to pay federal estate taxes and other estate-settlement costs owed after both spouses pass away. The product was developed in the early 1980s in response to a law that enables married couples to delay federal estate taxes until both spouses pass away. This law helped surviving spouses avoid potentially depleting their finances to pay sometimes significant taxes, but unintentionally put the burden on any remaining heirs.

Why Should I Consider Second-to-Die Insurance?

Under federal tax law, a marital deduction permits you to leave an unlimited amount of assets to your surviving spouse. If you leave all your worldly possessions to your spouse, no federal estate taxes are owed at the time of your death. Those assets then become part of the estate of the spouse and might be taxed when the surviving spouse eventually dies. The death benefit from a second-to-die life insurance policy could help pay those taxes.

Your beneficiaries can pay estate taxes with the payout from your policy. You don’t want them to be forced to sell your house quickly or liquidate assets to pay an estate tax bill. Additionally, when you buy the policy, you’ll pay less than the estate taxes will cost.

There may be other reasons to purchase survivorship life insurance. For example, parents with special needs children could consider survivorship life policies to provide for those children after both parents have died.

How Does Second-to-Die Life Insurance Work?

For the past 30 years, second-to-die life insurance policies have been sold to people for tax savings and flexibility. You start off paying annual premiums (or even one single premium) that more than cover your death benefit. The excess grows tax-deferred, building cash value that is supposed to cover some or all of higher premiums as you age. However, during the 80's and 90's, policies were sold with projections showing earnings of 6% to 12% interest. With the Federal Reserve keeping interest rates low for the better part of the past decade, it’s been more like 3% or 4% interest with a minimum guarantee.

If you already have a second-to-die life insurance policy, be proactive. You should request a review of your policy from the insurer. This can give you a picture of how much the policy will pay out in the event of your death. Depending on your age, you might decide to: sit tight; reduce the death benefit to make the cash reserves last longer; put in more money (if you’re sitting on cash and a 4% return is guaranteed); exchange the policy for a different one; or sell the policy. It’s always advisable to work with a knowledgeable insurance agent when making these decisions.

The 4 Advantages of a Second-to-Die Life Insurance Policy

1. It’s more affordable. Second-to-die life insurance is often more affordable than traditional single-insured life insurance with the same dollar amount in benefits. The premium is based on the joint life expectancy of the couple. Because the insurance company pays nothing until both spouses die, the premium is significantly less expensive than buying separate policies for both people.

2. It’s easier to qualify. The insurance company is less concerned that one spouse might not be in good health, because both policyholders must die before the benefit is paid. It’s easier to qualify for a second-to-die life policy than for single-life insurance, which may be denied if one spouse is in poor health.

3. Estate planning. In some cases, second-to-die life insurance is marketed as a way to build an estate, not just protect it from taxes. Like traditional life insurance, the death benefit of a second-to-die policy can ensure your beneficiaries receive a minimum amount of money, even if savings and other retirement income is spent during the lives of you and your spouse.

4. Protects your estate. A second-to-die life insurance policy is attractive to those who feel strongly about keeping property within the family. They buy a survivorship policy so their estate transfers intact to their heirs. They want to see the family cabin remain in use for generations to come rather than be sold to pay off those cumbersome death taxes.

Who Can I Contact Regarding Survivorship Life Insurance?

In a survey by Principal Financial Group, these life events would make those polled seek advice from a financial professional:

• Retirement

• Inheritance

• Marriage

• Death

• Birth of a child

Because survivorship life insurance encompasses all of these, it is extremely important to work with an experienced professional. Our insurance agents are always available to answer any questions you may have concerning second-to-die policies. They can assist you in reviewing your current policy or support you in finding a survivorship life insurance policy that meets your budget and goals. Whether you desire a more affordable insurance option for you and your spouse, or you want to ensure your heirs can keep any property you wish to leave them, Our agents can help every step of the way.