Passing wealth down to future generations is critical for most high-income earners. One of the most popular methods is a second-to-die insurance policy. The policy is ideal for couples who want to share life insurance with specific beneficiaries—such as grandchildren and children.
Second-to-die life insurance can help pass wealth through the generations and offer estate planning advantages. However, only 33% of Americans have an estate plan for their wealth. As a result, millions of Americans may struggle to pass wealth after they pass away to future generations.
In this article, we’ll discuss why a second-to-die insurance policy is excellent for passing down wealth.
What Is a Second-To-Die Insurance Policy?
A second-to-die policy ensures the beneficiaries receive the death benefit after the second policyholder dies. The primary goal of a second-to-die insurance policy is to limit the tax burden on a surviving partner. Rather than paying federal estate taxes after the first partner dies, the surviving partner can avoid exhausting their reserves to cover estate tax.
Second-to-die insurance policies have similarities with joint insurance policies, which typically come with a first-to-die provision. As a result, joint life insurance policies pay the surviving partner after the first person passes away. In contrast, some insurance policies offer second-to-die contracts, whereby future generations receive the benefits after the second person dies.
The Benefits of a Second-To-Die Life Insurance Policy
Here are some of the main benefits of using a second-to-die life insurance policy for your estate planning:
Affordability - In many cases, the premium payments of a second-to-die life insurance policy are less than two individual premiums for policyholders.
Easy to qualify - When you use standard life insurance policies, poor health can make it problematic to purchase the policy. However, it’s easier to qualify for a second-to-die life insurance policy even if one partner has poor health.
It’s an estate planning tool - It’s always essential to use estate planning tools to pass down wealth, and a second-to-die life insurance policy is a superb one. It can help with tax planning and issue a death benefit to your beneficiaries.
It’s customizable - You can work with your insurance company to customize a second-to-die insurance policy that benefits you.
The Downsides of a Second-To-Die Life Insurance Policy
As with any insurance policy, there are downsides to using a second-to-die insurance policy. Here are some of the potential pitfalls:
No benefits for the surviving partner - If the policyholders have removed one or more people as beneficiaries on the policy and continued to pay premiums—the surviving partner won’t obtain any death benefit.
The final payout could be decades later - If the surviving partner lives decades longer after the first partner dies, the beneficiaries will be waiting even longer to receive the benefit.
Tricky situation if partners split - Many complications could arise if the couple divorces, including awkward negotiations.
Is a Second-To-Die Insurance Policy Right for You?
Sometimes, a second-to-die insurance policy might be the right choice for you. However, it’s not a wise idea if the surviving partner would financially struggle after the death of their partner. Look for other insurance and estate planning options if second-to-die policies don’t meet your financial requirements.
If you want to pass down wealth to your children and grandchildren, a second-to-die life insurance policy might benefit you. We can help you with estate planning and finding the best life insurance policy at DPH Financial Services. We will customize a plan to suit you.
Contact us to see how we can assist you.