A second to death insurance or compliance life insurance is a life insurance that insures two lives and pays a death benefit when both insured die. This type of life insurance costs much less than traditional life insurance which only insures one life. It has a specific life insurance planning application, but some agents look to die policy when discussing life insurance for its cash value accumulation. Today I want to go through all the ins and outs of second to die life insurance and help you better understand where it shines and where it probably does not belong.
A Second Example of Death Example
Second to Die policy exists primarily to help families plan for the transfer of tax payments. Transfer taxes are those that are assessed on the death of an individual and represent a tax on the transfer of assets from one person to another (generally non-spouse, but not necessarily always). The most widely recognized transfer tax in the United States is the Federal Estate Tax. Several other transfer taxes exist at various state levels, as do some other transfer taxes at the federal level.
Survival policy works to provide the liquidity needed to pay taxes when they fall due without the need to liquidate other assets to cover the tax bill.
For example, let's say that Jack and Dianne have property with an estimated Federal Estate tax of $ 5 million. Although they do have assets to cover the tax, the majority of those assets are a business they own and real estate. If Jack dies, he can easily transfer all assets to Dianne as sole owner and no taxes are due right now (and vice versa). But when Dianne dies, her property must file IRS 706 and pay all property taxes payable within nine months of Dianne's death.
Given the complexity of most large farms (ie those large enough to have a tax debt) it is highly unlikely that Dianne's CEO (trix) will be able to sort out and sell the assets required to cover the tax bill within the 9 month timeline. In some cases, the farm can apply for an extension. But the second option that will resolve the issue faster and keep all of Jack and Dianne's assets intact for their planned heirs, is simply to buy life insurance to pay the taxes to be paid.
The only small problem they face from a strategic point in time. vision is to know who will die first and second. They may be able to buy a standard life insurance policy that insures each of their lives for half of the estimated property tax. This may work, but the life insurance industry has another option that will generally be cheaper and also potentially avoid the problem if one spouse is healthy while the other is relatively unhealthy.
The answer is the second who dies life insurance. It will insure both Jack and Dianne and will pay the death benefit for the insurance only once after both insured have died.
Quick Pro Tip: Solving this problem is much more complicated than just buying life insurance. Federal tax law requires Jack and Diane to purchase the policy with specific tools that remove life insurance from their property. If you are interested in this process, here is a video we made as an introduction to irrevocable life insurance funds and how they work.
Why Survivorship Life Insurance is Cheaper Than Traditional Life Insurance
Second, joint insurance policies offer much more death benefit for the same premium than individually insured insurances. Life insurance companies can offer these insurances at much cheaper premiums because they involve a significantly lower cost to the insurer.
There is no magic involved here, it's purely mathematical. The insurance companies that cost their lives to insure someone are the reserve they must have for the outstanding death benefit. This is in principle the probability that the insured dies during a certain year. First-class policies can use conditional probabilities, which always reduce the probability of an event. In the case of a survival policy, the probability that both insured will die in a given year is significantly less than the probability of one of them dying.
For example, let's assume that the probability of Jack dying is 2% and the probability. that Dianne dies is 1
This significant difference in the probability that the life insurer will have to pay a death claim means that the insurer can charge much less for a survivor's policy than it would for an individually insured life insurance policy.
To compare the pricing of a second to life insurance with a regular life insurance that only insures one life, I took an example of the whole life policy.
Assuming that a man and a woman both 45 years old seeking a $ 1 million death benefit, the required full life premiums are distributed as follows.
The required premium for the 45-year-old man is $ 16,730 per year.
The required premium for the 45-year-old woman is $ 14,820 per year.
The required contribution for the second death policy is $ 11,129 per year.
Although this hypothetical couple wanted to split the death benefit and buy $ 500,000 each, the distribution of the premiums is as follows.  The required premium for the 45-year-old man is $ 8,430 per year.
The required allowance for the 45-year-old woman is $ 7,560 per year.
By combining the two premiums when dividing the death benefit, this couple pays $ 15,990 per year to have a total of $ 1 million covering both of them, which is $ 4,861 more than the survivor's life insurance policy.
The second die policy is perfectly designed to address the transfer tax issue. Couples generally buy life insurance only for tax purposes. The tax liability is usually due to the death of the last surviving spouse (Quick note: there was a time when this was less frequent, but due to changes in tax legislation, this is now the case most of the time). Couples can guess, but they rarely know which spouse will die first. Life insurance compliance handles all of this and makes it a significant discount compared to traditional life insurance with a single life insured.
Are you going to use this type of insurance for cash accumulation plans?
It's tempting to think the other dying policy will take the strategy of using life insurance as a retirement plan or other long-term savings strategy and increase results. While it is true that a survivor's policy has all the usual tax benefits enjoyed by life insurance, the lower cost of these insurances does not always mean that they will perform better in terms of the return on premiums paid.
For example, here is a comparison of a scenario that uses either individually insured whole life insurance policies versus one second to die whole life policy issued by the same company:
We assume that husband and wife are both 45 years old and want to put 25 $ 000 each in a full life income planning policy (this means that the insurers use a design to maximize the cash value and potential income from the entire life insurance). Alternatively, they could buy a second to die policy with an annual premium of $ 50,000 (also use the same design adjustments to optimize cash value and income).
Male age 45:
Female age 45:
Second to Die Policy male and female age 45:
Some important observations from these results:
The other who dies policy has much greater death benefit than the combined death benefits from the individually insured insurances. For all three insurances, this is the minimum unmodified death benefit (MEC) for the planned premium. This means that it is the lowest death benefit we can have for not violating the Seven Pay Test and causing the policy to become an MEC if we pay this premium amount to the policy.
The individually insured insurances have significantly more cash value combined between them the first year versus the second to die policy. The individual policy maintains a higher cash position indefinitely.
However, the second death policy projects a little more maximum income than the individual insurances (I solved the maximum income from the age of 66 to 100 years) even though the second death policy had less money than the combined individual insurances during the year income begins. This is a result that requires us to be a little suspicious. I theorize that lower long-term costs under the second death policy drive this higher income forecast – I would still be wary of believing that and recommending that someone buy the survival policy over the individual politicians.
There are also several practical obstacles to recommending a second to die policy in this context.
First, while many people who come to us to buy life insurance solely for their cash accumulation functions say that the death benefit is insignificant to them, we find that 95% of the time death benefits become somewhat more important on the way to choosing the right policy for them . Since a second to die policy does not pay any death benefit until both individuals die, this takes the death benefit off the table in a way that few people desire. This is largely the case because the use of life insurance in this way can have the death benefit as a secondary priority, but it rarely completely removes from the picture. In other words, having death benefits provides an extra layer of financial security that many people greatly appreciate. Survival policy simply cannot do this.
Second, when there is an income gap between a husband and wife (often in our experience), the second-die policy creates a large potential burden on the low-income earner that would make her survive the higher-income earner. . This is not the case for situations where each spouse has a policy that insures him / her. If a spouse dies, the death benefit creates the capital needed to continue life as planned.
Third, but somewhat related to the second point, when using life insurance for income (like the example above) the death benefit for politics can provide an even greater degree of peace of mind when a spouse passes. The death benefit can add another layer of security for the remaining spouse in an effort not to survive the money the couple saved for retirement. is an excellent tool for property planning. This can be a plan to provide funds for transfer taxes, or simply to raise money earmarked for heirs or charitable causes. There is also a possible application for these products to help with some planning of long-term care costs.
However, as a cash accumulator, life insurance survivors do not often shine against an alternative individually insured plan. The individual plans tend to work better to accumulate cash value and they provide additional financial security that a second to die policy cannot.