life insurance

Discover The Worth of Second to Die Life Insurance Policy By Viewing It from The Right Perspective

By: Isabella
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Survivorship life insurance policies are different from any other types of life insurance policies in that it covers two lives instead of one. Another difference from traditional life insurance policies is that the survival benefit is payable to the beneficiaries of the plan only when both insured persons pass away. This aspect contributes to the naming of such life insurance policies as second to die policies. This type of policy typically insures the lives of husband and wife, and the purpose of taking the policy is to cover substantial estate taxes by providing liquidity to the estate.

According to the tax laws, you need not pay federal income tax on the proceeds from life insurance policies. The same applies to life insurance policies owned by a trust, which on satisfying specific legal criteria remain exempted from being a taxable estate for the lives covered by the plan. The purpose of taking cover for the couple is to take advantage of the present federal tax rules that allow postponement of estate taxes until the death of the couple.

Providing liquid assets to an estate

Cost-effectiveness is one of the reasons for the attraction of survivorship policies because you pay much less for taking the policy than what you would have paid for covering the lives separately. Moreover, it is an efficient way of providing an estate with liquid assets so that you need not have to indulge in panic selling of liquid assets or bond and stock portfolios.

Think of customized premium plan

When buying a second to die life insurance policy, you should bear in mind that the premium is payable even after the death of any one of the persons covered. Therefore, it is essential to make sure that it will be possible to keep paying premiums for the entire life of the covered individuals to maintain the policy because no insurance benefit is payable during the lifetime of the policyholders. To ensure continuity of the policy after the death of one of the individuals covered by the plan, consider a customized structure of premium payment so that you fund the entire policy within a specified time thereby doing away with the amount of premium for the rest of life.

Is the investment worthwhile?

To judge whether it is worthwhile to invest in second to die life insurance policy you have to compare the rate of return on the life insurance policy to the rate of return that you could obtain by using the money for investment in other schemes after considering the liabilities of estate taxes.  It all depends on several assumptions and some mathematical jugglery including the most critical assumption of putting a date of death for the second person insured or surviving. The calculation might not be easy because of the most ironical aspect of life insurance that stipulates that the rate of return would be the highest only when death happens quickly.

Consider the asset allocation perspective

Instead of trying to ascertain the worth of survivorship policies with the help of sophisticated algorithm, a better way to evaluate its value is to view it from the perspective of asset allocation. Moving away from seeing insurance policies as an investment for protecting dependents in the event of the premature death of the bread earner, look at it as a vehicle of estate planning that helps to retain the estate without putting the beneficiaries under any financial hardships.

The best option is to go for a survivorship policy that guarantees the payment of death benefit on meeting the premium schedule.  The plan, instead of trying to build cash serves the purpose of providing a guaranteed death benefit. According to the present tax laws, if a duly constituted trust that owns the survivorship policy and the requirements of the trust is fulfilled, the proceeds from the policy will remain excluded from the taxable estate of the deceased and would not attract federal income tax.

The emerging picture

How you would look at survivorship insurance policy depends on your understanding of the modalities of the policy and your asset managing capabilities. The return though guaranteed does not guarantee the rate of return, which depends on the time of the death of the second person insured to die. The gains would suit those best that possess better health ratings and live under ninety-five years of age.  The best part is that the life insurance companies invest the money in taxable investments, but the beneficiary is not taxed when he/ she receives the proceeds.

From the asset allocation perspective, the death benefit of survivorship policy is comparable to any other investment. Moreover, it gives the opportunity of providing liquidity to assets like real estate and other illiquid assets so that you do not have to sell it at inappropriate times.

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