Concepts of a Survivor Life Policy

Second to die policies are a type of joint life insurance policies most commonly bought by married couples. The policies are normally, but not always, purchased as part of estate planning for larger estates that are likely to trigger estate tax. Before deciding if a second-to-die policy is right for you, it is important to understand exactly what the policy entails and the potential benefits.
Definition

A second to die policy, also called a survivorship policy, is a whole life or a universal life policy or term policy taken out on two people. While a standard life insurance policy is taken out on one individual and pays a death benefit when that person dies, the second to die policy is taken out on two people. When the first person dies, nothing happens and the second person continues to pay life insurance premiums. However, when the second person dies, the death benefit pays to the named beneficiaries.

Who Can Buy

Technically, any two individuals can buy a second to die policy. The price of the policy will be based on the aggregate statistical likelihood of both parties dying. For example, if an older person and a younger person bought a second-to-die policy together, the price of the policy's premiums would be determined by the expected life duration of both parties, averaged together. Although technically any two people can buy second-to-die policies, they are most commonly purchased by married couples.

Reasons to Buy

A second to die policy is purchased most often to pay estate taxes. When a married couple dies, his assets are generally transferred to his spouse without taxes. Any jointly held property, such as a home, also transfers to the spouse without taxes. However, when a large estate is transferred to a third party who is not a spouse, estate taxes may be assessed. As of 2009, estate tax applies only when an estate of 3.5 million or higher is passed on. Inheritance taxes may also apply on a state-by-state basis to smaller estates.

A second-to-die policy that pays when the second person dies may be used to pay these estate taxes, which means the estate will not need to be sold or broken up to pay taxes if the heirs can't afford the tax bill. Other reasons to buy may also exist. For example, if two parents are supporting a disabled child, a second to die policy may be purchased to provide support for the child once the second parent dies.

Benefits

Because two people are insured, second to die policies normally are easier to qualify for and cost less than traditional life insurance policies. Further, because they are whole life policies, they can be used as an investment vehicle that the parties can invest in to acquire a cash value in the policy and to earn returns. Finally, even if you don't have a large estate, a second-to-die policy can create one for your children. When the second person dies, the death benefit will pay off, ensuring your child or children inherits something, even if you didn't have money

Alternatives

Second-to-die policies includes numerous alternatives. A first to die policy is one alternative, which pays when the first of two insureds dies. Standard term or whole life policies can also provide death benefits when someone passes away. In addition, through estate planning, such as establishing trusts and transferring assets within legal limits while you are alive, you can avoid or limit estate taxes and thus remove the need for a second-to-die policy to pay those taxes upon your death.