A post-death policy is designed for couples who want to share a life insurance policy with specific beneficiaries, such as children and grandchildren. The life insurance company will make a payment to the beneficiaries only after the last survivor dies. We will explore what a second term insurance policy is and what you need to consider before going for this life insurance product.
Keep in mind that it’s often a good idea to discuss your unique situation with a financial advisor for help with decisions about your insurance options.
What is a life insurance policy?
A secondary insurance policy is sometimes called a universal life insurance policy. As the name suggests, the death benefit is paid to the beneficiaries only after the death of the second insured.
Married couples may be the most likely to pursue this policy. But it is an option for any couple who share a common financial interest. Other possible pairings for a secondary death policy include those in a civil partnership, cohabitation or business partners.
In many cases, this type of policy is used by married couples to pass on wealth to their children. But other partners, including business partners, can choose to take advantage of this insurance option.
The main difference between this policy and other options is that the surviving partner will not receive any benefit when the first partner dies. Instead, the insurance company withholds the policy proceeds until the surviving partner dies.
Insurance policies can include a cash value that accumulates over the term. As you get older, the cash value increases to cover higher annual premiums. Over time, the cash value of your policy will grow tax-deferred.
How policies work after death
Generally, this type of insurance policy is designed to pay estate taxes or pass property to surviving heirs. Policyholders will make annual premium payments to cover the death benefit. After both policyholders pass away, the insurance company will issue a death benefit payment to the policyholder.
The goal of a secondary policy is to limit the tax burden of a surviving partner. Instead of paying federal estate taxes after the first spouse’s death, the surviving spouse can avoid depleting his or her reserves to cover estate tax bills.
Second term policies have some similarities to joint insurance policies, another type of joint life insurance between two people. Joint life insurance generally comes with a “first-to-die” provision. It pays out to the surviving partner after the death of the first insured. However, some common life insurance policies are written as second rate policies.
Advantages of a second year insurance policy
Here’s a look at the benefits of a secondary use policy:
More accessible. In most cases, the premium payments for a second term life insurance policy are significantly less than paying two separate premiums for the insured.
Easier to qualify. With traditional life insurance policies, poor health can make it difficult to lock in a policy. As long as there are two policyholders, it is possible to get an insurance policy even if one partner is in poor health.
Property planning tool. A life insurance policy is a useful estate planning tool. Not only can it help with tax planning, but it will also issue a death benefit to your beneficiaries.
Customizable. When choosing an insurance policy, you can work with an insurance company that offers adjustments for your unique situation.
Disadvantages of a second year insurance policy
There are also some potential downsides to consider:
Sticky situation if partners break up. A divorce can lead to awkward negotiations about how to manage the policy.
No benefit to surviving partner. In cases where policyholders have removed one or more persons as beneficiaries but continued to pay premiums for the policy, the surviving partner will not receive any death benefit.
Final payment may be made decades later. If one partner lives much longer than the other, beneficiaries will wait a long time before receiving a death benefit.
When is a second death policy a good idea?
A post-death insurance policy is not the right life insurance policy for every situation. But in some cases, it makes the most sense. Typically, wealthy families buy this policy with the goal of passing money on to their heirs. It is not a good idea if one of the survivors will struggle to cope after the death of the other. If one of the spouses would need a death benefit to meet their financial obligations, then it is smart to choose policies that prioritize the financial well-being of both partners.
The bottom line
Life insurance is a useful tool to protect the interests of your heirs. If your spouse does not need a death benefit to get by, then a posthumous life insurance policy is a relatively affordable way to provide services to other beneficiaries.
Life Insurance Tips
When choosing a life insurance policy, the right fit varies based on your unique circumstances. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors serving your area, and you can interview your advisors at no cost to decide who is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Finding the right life insurance policy starts with asking yourself a few questions about your goals. If you’re not sure how much coverage you need, check out SmartAsset’s free life insurance calculator.
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