How does second-to-die life insurance work?


Second-to-die life insurance, also referred to as survivorship life, is a life policy, sometimes a combination of policies, which insures two or more people and pays the face value when the last of the insureds dies.

Typically, second-to-die life insurance is used to cover the lives of a husband and wife. Although normally buyers opt for permanent (including traditional whole life, current assumption whole life and universal life), some insurance companies offer term survivorship life policies, too.

When is Second-To-Die Insurance Used

Second-to-die life insurance is extensively used for the following reasons:

  1. In estate planning, especially when there is a considerable estate. An unlimited marital deduction comes into play to lower or defer the federal estate tax. Second-to-die life insurance provides estate liquidity upon the second death of a married couple.
  2. To protect spouses with successful careers against the loss of earnings, in case both of them die.
  3. To provide protection of a company against the potential loss of key employees, such as executives.
  4. To fund charities.

Pros and Cons of Second-To-Die Life Insurance

  • Premiums are lower and more affordable than if two individual life policies were to be issued.
  • A number of alternative term/permanent life combinations provide flexibility in death proceeds settlement options and premium payments.
  • Applied alongside with the marital deduction, second-to-die life insurance is a tool of waiving estate taxes.
  • Medical standards are usually lax for one of the insureds because of the fact that the face amount is not paid until the second insured dies.
  • If the policy is split into two dollar plans, there is a lower taxable benefit.
  • One of the serious drawbacks is that second-to-die insurance offers no benefits upon the first insured's death, unless a special rider is included in the contract.
  • Premiums in term/permanent plans can soar if the dividends are lower than expected.
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