Click here to print:  Survivorship Life Insurance (Second-to-Die Policies)

By Jonathan R. Bauer

Life insurance has an important place in both construction businesses and estate planning for owners.  Second-to-die policies can be an important part of effective planning for both small business owners and anyone who is a parent.

Survivorship life insurance policies are sometimes known as “second-to-die” policies for an obvious reason: the coverage insures both spouses and the proceeds are payable only after both spouses have died.  The premiums on these policies are generally less than those for two single life policies.  Additionally, underwriting standards are generally more liberal for second-to-die policies, which means that someone who has been denied coverage under a single life policy, or who has medical conditions that make premiums extremely expensive, may be eligible for insurance, or less expensive insurance, under a second-to-die policy.  For these reasons, if a second-to-die policy fits your needs, it may be a perfect choice.

Conventional wisdom has been that second-to-die policies were good for two main purposes: to cover estate taxes after the second spouse dies and to provide for a “special needs” child.  Although often estate tax planning can avoid taxes when the second spouse dies, sometimes, for a variety of reasons, such planning is not done (or is not done properly) and the second spouse’s estate is hammered with a huge estate tax bill.  This can be devastating, particularly when a family business is involved. 

Often, a family business is created by a husband and wife who, in their older years, hand the management of the business over to their children.  However, the parents maintain a controlling ownership interest in the business to make sure that things continue to run smoothly.  Often, this business is the couple’s most significant asset (sometimes worth several million dollars).  Without appropriate planning, when the second of the two parents dies, the children may have to sell all or part of the business just to pay the estate tax bill.  This often means the end of the business and the parents’ legacy.  A second-to-die policy can help pay the estate taxes and allow the children to keep the business.

Parents with a disabled child often believe that so long as one of them is alive, they can care for that child.  However, if both parents were to pass away, both income streams are gone and the disabled child may have no financial resources.  A second-to-die policy can be an affordable way to alleviate these problems and provide money for the disabled child after the parents’ death.  This can be particularly effective if the policy proceeds are placed in a “special needs trust” which is designed to allow the disabled child to remain eligible for government assistance while still making the insurance proceeds available to be used for the disabled child’s benefit. 

One potential scenario for second-to-die policies that is often overlooked is when a couple has minor children.  This situation calls for planning similar to that seen with a disabled child and a second-to-die policy (particularly a term policy) can be invaluable for the parents.

Often, families with young children don’t have significant discretionary income to put towards life insurance premiums.  Also, often both parents work and are capable of earning a living in the event the one spouse dies.  For these reasons and others, parents often feel that they may be able to “get by” without a significant amount of life insurance.  However, what if both parents were to die while their children were young?  They may have appointed guardians for their children in their wills, but what if they have not properly planned to provide those guardians with the assets needed to raise their children?

A second-to-die policy can be a perfect and relatively inexpensive way to give parents peace of mind.  Parents can buy a term policy which is in effect for what they deem is an appropriate period of time (until their kids are 18, 21, 30, etc.).  Then, when their children are grown and responsible for themselves (hopefully) the policy is simply terminated.

For many people, business and estate planning is geared towards avoiding catastrophe.  Those seeking this peace of mind should at least consider including life insurance as part of their planning.  However, not everyone can afford the perfect life insurance policy.  Those people, in particular, should consider a second-to-die policy that may provide that peace of mind at a price they can afford.