Second to Die Policy as an Investment
A survivor policy is an excellent long-term investment when your goal is to pass down the maximum amount of money to your children.
A second-to-die policy offers a predictable mechanism to pass tax-free money to your beneficiaries through a wealth transfer strategy.
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A second-to-die policy also allows moderately wealthy families the opportunity to leverage current assets to maximize their total net worth.
So, is a second-to-die policy a good investment for your family?
Conservative Asset Class
Whether a second to die policy is a good investment depends upon the rate of return of the life insurance policy compared to the rate of return that would have been earned in other investments such as stocks, bonds, and real estate.
Plus, you would also need to assume a certain life expectancy on the second insured. Keeping in mind that the sooner you die, the higher the rate of return on the premiums paid.
As you can see, constructing a formula to determine the rate of return of a second to die policy could get complicated.
A more useful approach is to view a second-to-die policy as a conservative asset class.
Meaning people should view survivorship life insurance as a conservative investment class, which will also protect children from the premature death of their parents.
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If a trust owns the survivorship policy, the death benefits will also be free from federal income taxes and not part of the deceased’s taxable estate. This is why the second die policies offer an excellent tax-free wealth transfer strategy.
Inexpensive and very easy to qualify
Second to die life insurance premiums are often much more affordable than normal life insurance with the same dollar amount in benefits.
The life insurance company is less concerned that one spouse might not be in good health because both policyholders must die before the death benefit is paid out.
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.
Great Return on investment
A Second to die life policy provides a much better return on investment (ROI) than individual universal or whole life policies.
When evaluating wealth transfer insurance coverage for our clients, we always provide illustrations showing the internal rates of return on the death benefit at various ages.
These are the rates of return that you would need compare to your other investments to make sure a 2nd to die policy is a good way to build your estate.
Assuming the average life expectancy between age 84 and 87, life insurance generally offers 6 to 8 percent tax-free returns. So, you would need to earn an equivalent yield of over 9 to 12 percent in a taxable investment.
We can also calculate the taxable equivalent rates of return, assuming your particular tax bracket. This is an easy method to compare a life insurance policy to other family wealth transfer strategies.
Tax-Free Death benefit
Are life insurance proceeds taxable upon my death? Life insurance proceeds refer to the death benefits of the life insurance policy.
The great thing is that there is not any tax on a life insurance payout to your named beneficiaries. The beneficiaries of a second to die estate planning policy are normally your children, an irrevocable life insurance trust, or a Dynasty Trust.
This means that funds from a life insurance payout are not included in your beneficiary’s gross income and do not need to be reported to the IRS.
So, a big advantage of second-to-die life insurance is that the life insurance company invests the premiums in taxable investments. Still, the death benefits are paid to your children 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.
So, the only life insurance taxation would occur on the interest earned on your death benefit.
Note: Many ultra-wealthy people look at 2nd to die life insurance because their estate is so large that it will eventually create an estate tax problem. If you think your estate will eventually create a tax problem, you may also read our article on survivorship life insurance for estate protection.
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