How to Use a Second-to-Die Policy as an Investment

Second to Die Policy as an Investment 

A second-to-die life insurance policy is set up to insure married couples and does not pay out until the surviving spouse passes away.

Joint life insurance policies are an excellent long-term investment when you aim to pass the maximum amount to your children.

Survivorship life offers a predictable mechanism to pass tax-free money to your beneficiaries through a wealth transfer strategy.

They offer a much better return on investment (ROI) than individual universal or whole-life policies.

These policies allow moderately wealthy families to leverage current assets to maximize their total net worth.

Here are just a few reasons why a second-to-die policy is a good investment for your family.

Inexpensive Coverage

One of the benefits of second-to-die policies is that they are more affordable than buying two separate policies. 

This is because the insurance company only pays out the death benefit after both insureds pass away, which reduces the risk for the insurer.

We have found that the rate of returns is excellent for people who can qualify for either a preferred or standard health rating and pass away before age 95.

 

Conservative Asset Class

Life insurance is a secure asset that offers beneficiaries a guaranteed and tax-free payout upon the policyholder’s death.

This means that regardless of market fluctuations or investment performance, the beneficiaries will receive an amount free from income tax obligations.

The fixed and guaranteed nature of life insurance ensures that it remains unaffected by changing economic conditions or the success of other investments.

It provides peace of mind knowing that loved ones will receive financial support when they need it most, without any additional tax burdens.

Great return on investment

Determining the value of second-to-die insurance as an investment requires comparing its rate of return to other assets such as stocks, bonds, and real estate.

When assessing coverage for our clients, we provide illustrations that display the internal rates of return on the death benefit at different ages.

These rates indicate how much you would need to earn from your other investments in order for a second-to-die policy to be a worthwhile addition to your estate-building strategy.

Typically, life insurance offers tax-free returns ranging from 6% to 8%, assuming an average life expectancy between 84 and 87 years old.

To match this level of return with taxable investments, you would need yields exceeding 9% to 11%.

We can also calculate the taxable equivalent rates based on your specific tax bracket, making comparing life insurance policies with alternative strategies for transferring family wealth easier.

Tax-Free Death benefit

Is a second-to-die policy taxable upon my death? The great thing is that there is no income tax on a life insurance payout to your named beneficiaries, and a claim does not need to be reported to the IRS.

So, a significant advantage of second-to-die life insurance is that the life insurance company invests the premiums in taxable investments, and the death benefits are disbursed to your kid’s income tax-free.

In some cases, the beneficiary of a life insurance policy may elect to receive the death benefit in a series of installments.

If the beneficiary decides to keep the proceeds invested with the insurance company and receives a series of installments over time, any interest received on the installments will be taxed and must be reported on your taxes.

Life Insurance for Estate Planning

Many affluent families incorporate second-to-die life insurance into their estate planning strategy when their gross estate is substantial enough to trigger an estate tax liability. 

After the death of both spouses, the death benefit provides a timely cash injection, which helps settle estate taxes, preserves family assets, and alleviates financial stress during a challenging period.

As of 2024, each spouse can claim an exemption of $13.61 million individually, allowing couples to pass on up to $27.22 million without paying taxes. However,  these federal estate tax exemptions may be significantly reduced by 2026.

Typically, the beneficiaries of a second-to-die policy are children or entities like Irrevocable Life Insurance Trusts (ILIT) or Dynasty Trusts.

If you foresee potential tax complications with your estate in the future, consider having an ILIT own your survivorship life policy to remove it from your taxable estate.