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Do Second-To-Die Policies Merit A Second Chance?

Second-to-die life insurance (also called survivorship life insurance) was a hot commodity during the 1980s and ’90s. Less expensive than normal single coverage, this kind of policy provides a benefit only after both spouses have died, and it was appealing as a way to help heirs pay inheritance taxes. But with estate tax rates falling and individual exemptions rising sharply during the past decade, second-to-die insurance lost popularity. Yet while there’s no federal estate tax at all this year, the levy is scheduled to return with a vengeance in 2011, and that is reviving interest in these policies.
With a second-to-die policy, both spouses are insured, but there’s no benefit when the first spouse dies. Instead, all of the policy proceeds are paid out after the surviving spouse—or the “second” spouse—passes away. Because spouses normally can inherit an unlimited amount from each other without estate tax liability, it’s the second death that may trigger taxes, and that’s just when second-to-die insurance delivers.
Because these policies are based on the joint life expectancies of both spouses, the annual premiums are generally less than the cost of two individual policies with the same total death benefit. Also, you may be able to obtain a second-to-die policy even if only one spouse is insurable.
Today’s renewed interest in second-to-die insurance stems from the bizarre circumstances surrounding the federal estate tax. Repeal legislation in 2001 called for the tax to be phased out by 2010, with estate tax rates moving lower and exemption levels higher in the meantime. In 2009, $3.5 million of an estate was exempt from inheritance taxes, and that greatly reduced the number of people who had to worry about potential tax liability. But after a year without the tax, it will return in 2011, with an exemption of just $1 million. Further complicating the situation is that at any time Congress could enact a permanent fix for the law.

Against that uncertain backdrop, having second-to-die coverage could make sense for couples who worry that their heirs might also inherit an estate tax bill. Life insurance proceeds could cover whatever liability applies at the time, with the rest distributed to your beneficiaries. And like other kinds of life insurance, a second-to-die policy could also be used to fund other financial priorities. Those might include:

  • Protection against the forced sale of a business interest
  • Satisfying charitable intentions without substantially reducing other holdings
  • Funding the special needs of a family member with a disability
Though second-to-die insurance won’t fit every couple’s financial needs, with the fate of the estate tax yet to be decided, it may be worth considering. We can work with you to assess your situation and help you decide whether this kind of insurance is right for you.

This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.

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