If you own a wealthy estate and are looking into purchasing life insurance, but worry about the estate taxes being too high for your family to take care of when you die, there is hope out there. A second to die life insurance policy, also known as survivorship life, can help. That’s because second to die life insurance policies don’t pay out until the second insured person on the policy passes away. In many cases, the death benefits from the policy are meant to be used on outstanding taxes, so with the proceeds of your policy, your beneficiaries will not have to scramble to sell the estate or your possessions, in an attempt to pay the bills once you are gone.
With second to die life insurance, if you die and leave all your worldly possessions to your spouse, they will not owe any federal estate taxes — at least not yet. Those possessions become part of the surviving spouse’s estate, which will then be taxed after he or she dies. Business partners even look into getting second to die life insurance policies, due to the estate tax ramifications involved.
Perks of a second to die policy
Cost. Since the premium of a second to die policy is based on the lives of both spouses, the life insurance company doesn’t owe anything until both parties die. This makes the premium cost significantly less than if you were to buy a traditional life insurance policy.
Qualifying is easy. It’s easy to qualify for a second to die life insurance policy rather than a traditional life insurance policy, because since the policy doesn’t pay out until both parties die, the insurance company isn’t as concerned if one person’s health isn’t 100 percent. Even if one spouse is considered “uninsurable” by a traditional life insurance company, they may still be covered in a second to die policy, depending on the insurance companies definition of “uninsurable”.
Helps build and preserve your estate. A second to die policy not only helps to build an estate and insulate it from taxes, but it also helps to preserve the estate by having the life insurance company pay the taxes once it is transferred to your heirs.
Pays estate taxes. Second to die life insurance policies can also help in the event you still owe federal estate taxes, individual retirement account income taxes or tax-deferred plans at the time of death.
Lets you have fun. Unlike whole life insurance policies, second to die allows you to buy into a variable universal life policy, which lets you invest some of your premiums in mutual funds within that policy. In doing so, you can try your luck playing the market.
The Rundown
If you’re seriously considering buying a second to die life insurance policy, be sure to fully understand the ins and outs of it. Know that if you have a small estate, or even a large one at that, you may still be able to avoid or reduce estate taxes by getting solid-estate planning advice. An estate-planning attorney may be helpful when considering a second to die policy. Also, it is important to consider and know the consequences of the “what ifs”-- What if you get divorced? What if estate tax laws change? Some companies will offer a rider to help split the policy, others don’t, so be sure to ask and fully understand what you’re signing into before you actually sign the contract.
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