Plan your Financial Future with Second-to-Die Life Insurance
If you’re in the market for comprehensive financial planning for the future, don’t overlook the value of life insurance. More specifically, the often overlooked second-to-die life insurance, also referred to as survivorship life insurance. This life insurance policy type provides coverage for two individuals, typically, a married couple, and only pays out upon the death of the second person. This policy can be an ideal life insurance choice for those intending to leave a legacy, support their beneficiaries, or effectively manage estate taxes.
Decoding Estate and Inheritance Taxes: What Might Your Heirs Owe?
Understanding how taxes might impact your children’s inheritance is key when planning your estate. Beyond the widely discussed federal estate taxes, state-level estate and inheritance taxes can often have a significant impact too, sometimes even more so.
The federal estate tax, often misunderstood, is paid by the estate, not the heirs, before asset distribution. The exemption for federal estate tax as of 2025 stands at $13.61 million per person or $27.22 million for married couples. Estates valued under these thresholds owe no federal estate tax. Those over the exemption get taxed at rates up to 40% on the excess. From 2026, the exemption will be $15 million per person.
Even if you evade federal taxes, you may still be liable for state-level estate or inheritance taxes. Many states impose their taxes with exemption amounts usually between $1 million and $5 million. Estate taxes are paid by the estate before distribution, while inheritance taxes get paid by the beneficiaries post receiving the assets.
Several states like New York, Massachusetts, and Oregon execute estate taxes. Meanwhile, states like Maryland, New Jersey, and Pennsylvania impose inheritance taxes. Inheritance taxes, where beneficiaries pay directly, are relatively rare but do exist in a handful of states such as Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.
In these states, spouses and direct descendants often pay no tax or benefit from reduced rates, while other beneficiaries may have to pay inheritance taxes.
Understanding these rules can help you plan more effectively and avoid nasty surprises for your heirs. If your estate is likely to be subject to federal or state taxes, you could consider strategies like gifting, trusts, or charitable giving to reduce the taxable amount or a second-to-die life insurance policy to provide tax-free funds to cover the taxes.
Fundamentals of Second-to-Die Life Insurance
Second-to-die life insurance policies cover two people. Unlike traditional policies, the death benefit is paid only after the death of the second person. This delay often makes it a cost-effective choice for those seeking to minimize premiums while still providing a financial benefit to their beneficiaries.
These policies are primarily used for estate planning purposes. They are often purchased to cover estate taxes, so the heirs are not burdened with selling assets or taking on debt to settle the estate. Because these policies insure both individuals under the same policy, they generally have lower premiums than two individual life insurance policies.
Key Benefits of Second-to-Die Life Insurance
Second-to-die insurance policies pay the death benefit only after both insured individuals have passed away. This structure allows insurers to take on less risk, typically resulting in lower premiums. Even if one spouse has health issues, the impact on the premium is often minimal compared to insuring two healthy individuals separately.
One of the most compelling uses of second-to-die insurance is as an estate planning tool. It can provide a tax-free death benefit that helps cover estate taxes, saving heirs from having to sell inherited property or investments to settle the estate. This is particularly beneficial when the assets are illiquid or emotionally significant, such as a family home or business.
Beyond taxes, second-to-die insurance can play a crucial role in preserving legacies. It allows parents or grandparents to leave a meaningful inheritance to children, grandchildren, or even charitable organizations. It can also be used to equalize the inheritance among siblings, ensuring fairness without disrupting the family business.
For philanthropy-minded couples, second-to-die life insurance offers a unique and potent way to leave a lasting legacy. As the policy pays out only after both insured individuals have passed away, it allows for long-term planning and can be structured to benefit charitable organizations in a tax-efficient manner.
There are also notable tax benefits. The proceeds from a second-to-die policy are generally income tax-free to beneficiaries. When structured properly, for instance, within an irrevocable life insurance trust (ILIT), the death benefit can also be excluded from the estate for estate tax purposes. This makes it a powerful tool for high-net-worth families seeking to reduce their taxable estate while still providing for their heirs.
Is Second-to-Die Life Insurance Right for You?
While second-to-die life insurance can be a powerful estate planning tool, it isn’t suitable for everyone. It’s important to evaluate whether it aligns with your long-term financial goals and family dynamics. Age and health are key considerations — although premiums are generally lower than individual policies, insurers still assess both individuals. If your estate is modest and not subject to estate taxes, this type of policy may not be necessary. It’s best suited for those planning to pass on significant wealth or facing potential estate tax exposure.
Another important factor is the long-term commitment required. Couples should be confident in their ability to maintain premium payments over time, as lapsing on the policy could result in losing the intended benefit altogether.
Common pitfalls include underestimating the impact of changing estate laws, failing to properly structure the policy within a trust (such as an ILIT), or overlooking the importance of regularly reviewing the policy as family circumstances evolve.
Second-to-die life insurance is ideal for couples who want to preserve their estate, minimize the financial burden on heirs, or leave a charitable legacy. Whether it’s helping a child with limited retirement savings, equalizing inheritance among siblings, or funding a philanthropic cause, this type of insurance offers a flexible and tax-efficient way to protect your legacy. Before making any decisions, it’s wise to consult with a financial advisor to determine how this strategy fits into your overall financial plan.
Bronwyn Martin, a Financial Advisor with Martin’s Financial Consulting Group, a financial advisory practice of Ameriprise Financial Services LLC in Kennett Square, specializes in fee-based financial planning and asset management strategies and has been in practice for 25 years.
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