2 July 2013 0 Comments

Two Lives – One Death Benefit

seniors walkingSecond-to-Die life insurance was introduced several years ago as a way for a married couple to provide cash to pay federal estate tax when the second of them dies.  Tax need not be paid until the second death because there is a marital deduction for all assets bequeathed from one spouse to another (if the surviving spouse is a U.S. citizen).

Typically the premium for a second-to-die life insurance policy is less than the premium for a like amount of insurance solely on the life of the spouse whose odds are greater of being the second to die.   For example, the annual premium for a male, age 68 and a wife age 65 who are both in the best underwriting category would be $62,660 for a$5,000,000 second-to-die policy.  The wife is younger and females have a longer life expectancy than males, so the premium for a policy on her life would be less than a policy on her husband.  The annual premium for a $5,000,000 policy strictly on her life would be $77,170.  In this instance the second-to-die policy produces an annual savings of 20%.

Does second-to-die always produce a premium advantage?  Not necessarily.  Take the case of the 75 year old man whose wife is 50. The husband’s coronary history makes him uninsurable  (that’ll teach him for marrying a child bride).  However, second-to-die policies will issue a policy if one of the lives is uninsurable.  If his young wife were in the best underwriting category, a $5,000,000 second-to-die policy would produce an annual premium of $57,845.  Instead, if the wife purchased a $5,000,000 policy only on her life, the annual premium would be $34,190.

In this instance, because of the big age difference and with an uninsurable husband, it is less expensive to place the insurance only on the wife.  Using a second-to-die policy would create a 69% increase in premium.  This is an extreme example, but points out that checking options is important.

In addition to proving estate tax liability for a married couple, there are other situations where this policy should be considered:

  • A couple (could be same gender) wants to care for loved ones only at the second death since they know that the survivor would provide. .
  • A business that could survive the death of one partner, but would need capital to continue to operate when both of them are gone.
  • A married couple with assets that do not put them into a need for estate tax liquidity, but who want to provide a legacy for kids or grandkids when they are both gone.

The guaranteed Internal Rate of Return (IRR) produced by the death benefit of second-to-die policies makes them an attractive consideration for many long range plans.

For the next several entries I’ll be discussing Long Term Care solutions.

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