Just the other week, I had one of the more interesting conversations with a client which sparked me to write this article. I’ve never been the kind of advisor that wants to ‘sell’ my clients insurance. I have always felt it to be best to implement risk management products for the best cost possible or utilize insurance vehicles in the best way to accumulate cash based upon each individual client situation.
One of my clients called the other day and said they were considering buying a second to die policy. When I initially heard the request, I said, “Well, you don’t really have a need for more life insurance and we have really good accumulation strategies set up for your other goals.” As the conversation deepened, he told me that he wanted to be 100% certain that when he and his wife died that each child would get 2 million dollars no matter what happened with the rest of his financial situation. This led to a more intricate conversation about whether to do what is called a second to die policy.
People often forget that life insurance goes income tax-free to your beneficiaries, and under today’s currently large estate tax exemption of more than 5 million dollars per spouse you can leave a significant amount of money to your kids both estate tax free and income tax free using life insurance. That is… if your goal is to leave your kids 1 million dollars or more.
How does second to die life insurance work?
Second to die insurance is normally an indexed universal life, variable universal life, or a whole life policy that only pays the life insurance benefit to the heirs at the death of the second person. The premiums on these policy will normally be lower due to the fact that TWO people have to die before the insurance money can be collected.
The good news is that underwriting can be easier on these policies, especially if one spouse is in poor health while the other is in good health. In the early stages of my career when the estate tax limitation was only 1 million dollars, you would see these policies built and sold all the time in irrevocable life insurance trusts. However, with the large estate tax exemption as it stands today, this actually could be an effective strategy to leverage today dollars to leave a large inheritance tax free for your kids in the future.
If you change your mind down the road, you could use the cash value of these policies for additional retirement income or attach other living benefits that may make sense for your family. But, if you are concerned about protecting your assets (IRA’s, brokerage accounts, or real estate) for your children, this could be a smart investment in terms of assessing the rate of return on your asset growth versus the actual rate of return for a death benefit which is guaranteed (because you will die one day).
Either way, there is no wrong or right on how much money you should leave to your kids as this is going to be your prerogative. However, it’s good to know what options are out there in case you choose to add this to your family plan.
