Second-to-Die Life insurance, sometimes known as Survivorship insurance, is a type of permanent life insurance which is frequently used to fund a special needs trust (SNT).
Characteristics of Second-to-Die insurance:
- It is permanent life insurance.
- It can be either Whole Life or Universal Life (UL). The most common type is UL. All the big carriers such as Prudential, MetLife and John Hancock offer a second-to-die option.
- Second-to-die insurance is set up to insure two individuals, usually husband and wife, but can also insure two siblings, a parent and child, or two business partners.
- It does not pay out until the second spouse or insured individual dies. Since parents are often concerned with what happens to their special needs child after their death, creating an SNT funded with Survivorship insurance can be the solution.
- Example: A Survivorship Policy is taken out on a married couple. The husband dies. Nothing is paid to the wife. When the wife dies, the death benefit is paid to the beneficiary; in this case, the SNT.
Benefits:
- It is less expensive than buying two individual life insurance policies on the parents. In fact, survivorship policies are approximately 25-40% cheaper than purchasing a policy on a single individual.
- Example: The following are insurance quotes from a major insurance carrier for a 50 year-old male with a preferred rating and a $1 million death benefit:
- Universal Life (UL) policy: $8,698/year.
- Second-to-die insurance policy using Universal Life: $5,508/year.
- Funds are available on the death of the second spouse when the funds are most needed.
- A paid-up policy guarantees the future funding of an SNT while keeping the parent’s estate intact for other family members.
- Ensures that funding is available to provide for the future care of the disabled individual.
- Preserves your estate.
- Proceeds are not taxable for income tax purposes although they are taxable for estate tax purposes.
- Easier to qualify for. It can often be a good option if one spouse has medical issues. Insurance companies are more likely to allow coverage for spouses who would normally be denied coverage or rated since the policy pays out on the death of the second individual.
Disadvantages:
- Upon the death of the first spouse, the remaining spouse may not be able to afford the premium payment on the second-to-die policy due to a reduced income.
- The surviving spouse could stop paying the premiums for other reasons, such as getting remarried.
One solution to the potential disadvantages is to purchase low-cost term insurance in the case of premature death. The couple may also want to structure the premium payments of the second-to-die policy so that they end at a finite time, such as their anticipated retirement age.
Second-to-Die life insurance is not always the answer, but it offers one more powerful tool to help provide for the future of your special needs child.