Second to die insurance plans have been around for quite a while. Not many know about the details of such a unique permanent insurance plan. This kind of policy is suitable for people with a high-value inheritance, owners of businesses and companies and people with high-value assets that may attract a lot of tax in the future. It is ideal for couples who want to leave behind a tax-free legacy for their children in the wake of uncertain property tax laws.
The truth about second to die insurance policies
Yes, it is true that survivorship policy only pays out only after the death of both the insured parties. It does not make sense to ones who do not have substantial inheritance and to those who do not have heirs. Second to die whole life insurance is not just a permanent insurance policy, you can get it as a variable universal life policy. Regular life insurance policies pay the benefactor upon the death of the insured. If you are looking for this kind of a benefit, then survivorship insurance is surely not for you. In fact, if you have a large (taxable) IRA fund that will pass down to your heirs, you should surely think about a second to die insurance policy. Even estates with a lot of liquid assets can benefit from survivorship life insurance by saving on a lot of taxes.
Not all second to die policies and insurance companies were created equal. Therefore you need to crosscheck a few basic terms and conditions before you can buy a policy.
Find a reliable company
A reliable company should have a history of satisfied clients and at least a website with honest reviews. You do not want to start with a policy that ends abruptly when the company goes out of business. You need people who have experience and a successful legacy.
Get a competent trustee
You need to find an expert who can handle your policy and keep it in shape. The person should be capable enough to handle the distribution of your trust in the event of your demise. He should be able to execute your instructions in favor of the agreed upon terms of the insurance policy and bypass the complications that arise from tax implications.
What is the value of your asset?
To be honest, the second to die insurance policies work best for people who have high-value assets. Once you create a policy and a trust, you will have to bear some cost to administer the trust. On top of that, you will need assets or money for the trust to use while paying the policy premiums. If you do not have a lot of taxable funds in the IRA or other retirement accounts, and if you do not have a rich inheritance, opting for a survivorship life insurance does not make much sense.
Be careful about the tax laws
It is unfortunate but not unforeseen. Sometimes, after a couple creates their trust and keeps paying their premiums, the entire policy may become invalid just due to a change in the tax laws. It does not even need to be a significant change, and even a reinterpretation of the law can invalidate the policy. It means, although you have paid every premium, your heirs will have to pay estate taxes as per the new regulations.
If you use your existing life insurance policy to fund the trust, it may become taxable. In case the second insured dies within three years of transferring their current life insurance to the trust, the federal government will include the death benefit in your inheritance or estate for tax purposes.
Keeping the policy alive till the second death
Continuing the policy becomes especially challenging when the cost of the premium becomes too high to bear. It can happen within a couple of months of creating the policy. Most companies insist on a thorough evaluation of existing liquid funds or insurance policy payments before one can sign up for a new second to die life insurance.
It is quite common in the USA. After the death of one insured party, the income of the family sees a sharp drop. The spouse is unable to keep up with the premium payments. It leads to the dissolution of the policy. It is quite unfortunate since all the premiums and payments made by the couple till date goes to waste, with literally no valuable returns from the policy.
You must remember that once you create and fund the trust, you cannot turn around and get your money back. It is a permanent policy that ONLY pays out if you can pay all the premiums and in the event, both insured parties pass away.