Second-to-Die Insurance: How it Works and Why to Buy It

By
Julia Kagan
Julia Kagan
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Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

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Updated May 24, 2022
Reviewed by
Marguerita Cheng
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Reviewed by Marguerita Cheng
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Marguerita is a Certified Financial Planner (CFP®), Chartered Retirement Planning Counselor (CRPC®), Retirement Income Certified Professional (RICP®), and a Chartered Socially Responsible Investing Counselor (CSRIC). She has been working in the financial planning industry for over 20 years and spends her days helping her clients gain clarity, confidence, and control over their financial lives.

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What Is Second-to-Die Insurance?

Second-to-die insurance is a type of life insurance for two people (usually married) that provides benefits to the beneficiaries only after the last surviving person on the policy dies. Second-to-die insurance is often used for estate planning, generally to fund an irrevocable life insurance trust (ILIT), or to pass along death benefits to children or grandchildren.

This differs from regular life insurance in that the surviving partner doesn't receive any benefits after the spouse dies. With regular life insurance, typically, a married individual will name their husband or wife a beneficiary, and they will receive the death benefit after the policyholder dies—but the policyholder can name any beneficiary that isn't a spouse as well.

Key Takeaways

  • Second-to-die insurance, also called survivorship policies, might be less expensive for couples to purchase than individual plans.
  • The death benefit for a second-to-die insurance policy may be used to offset estate-settlement costs.
  • Qualifications for survivorship policies may be less stringent than those used for an individual term or whole life insurance. 
  • Second-to-die insurance may be put into place to ensure beneficiaries can afford estate transfers of assets—like a family vacation home—rather than have it sold to pay taxes. 
  • Survivorship life insurance is typically less expensive than single-insured coverage since the premiums are determined by the joint life expectancies of the insured parties.

How Second-to-Die Insurance Works

Parents who take out this type of insurance are usually thinking of their children. For example, a second-to-die insurance policy could be designed to pay estate taxes or support any surviving children. It is also called "dual-life insurance" and "survivorship insurance."

Generally, second-to-die insurance is used for estate planning, and usually, it covers two or more people for less money than individual policies would cost. The death benefit from a survivorship life insurance policy is typically calculated to pay federal estate taxes and other estate-settlement costs owed after both spouses pass away.

The second-to-die life insurance product was developed in the 1980s when a new law enabled married couples to delay federal estate taxes until both spouses passed away. This law helped surviving spouses avoid depleting their finances to pay big tax bills, which put additional financial pressure on other remaining heirs.

A second-to-die life insurance policy starts off with an annual premium that covers the death benefit. The excess grows tax-deferred, building cash value that is supposed to cover some or all higher premiums as you age.

Joint-life insurance, also called second-to-die life insurance, is often more affordable than purchasing term life insurance or whole life insurance policies for each spouse.

Reasons to Purchase Second-to-Die Insurance

More Economical

The premium is based on the joint life expectancy of a couple, and because it pays nothing until both spouses die, the premium is significantly less expensive than buying separate policies for both people with the same total dollar amount in benefits.

Easier Qualification

If one person isn't in great health, it doesn't matter as much because both policyholders must die before benefits are paid. Otherwise, the person in bad health may be denied life insurance if applying for a single policy.

Estate Planning

In some cases, second-to-die life insurance can actually help build an estate, not just protect it from taxes. Like traditional life insurance, the death benefit of a second-to-die policy can ensure your beneficiaries receive a minimum amount of money, even if all the savings of the insured were depleted during their lives.

Maintains an Estate

Many people buy second-to-die life insurance policies in order to ensure their estate transfers to their beneficiaries are intact. For example, they may want to know the family cabin will remain in use for generations, rather than be sold to pay death taxes.

In the case of a divorce or separation, second-to-die policies are not easily divided or split into two individual policies. Some insurers provide optional riders to cover for this potentiality, at additional cost.

Who should own a second to-die policy?

Survivorship life insurance is often best for wealthier families, where the death of one spouse would not pose a severe financial burden on the surviving spouse. It has also been used for wealthier families to reduce the estate tax exposure to their heirs.

Is second to-die life insurance a good idea?

It can be, since life insurance premiums of a second-to-die policy are often lower than standard policies that insure only one individual. However, because of how it is structured, it will only pay out after both of the insured have passed away.

What is the difference between joint and second-to-die insurance?

Joint life insurance involves more than one (often two) insured individuals on the same policy. Joint life can be written either as first-to-die or second-to-die. In the former, the policy pays out when either of the insured passes away. In the latter, it only pays out after the second insured has also passed away.