Mike Smith at CPS Horizon Financial shares some key information on what a 2nd to die life insurance policy is and why you should consider it. If you would like to explore if a 2nd to die life insurance policy should be a consideration, contact the WFA team at 414-727-8181 to learn more.
2nd To Die Life Insurance Overview
2nd to die life insurance covers two people (typically a married couple) under one policy. It does not pay the proceeds of the life insurance until the passing of both insureds. When the first spouse passes there typically is little to no tax liability. It’s when the 2nd spouse passes that the tax bills start kicking in.
The “old” reasoning for having this coverage was to cover estate taxes that would be due when the second person passed away. This usually comes into play when the estate is worth over $22 million dollars. The “new” reason is because taxes will be due even on middle class estates and with proposed legislation, taxation is only going to get worse.
Impact Of New Taxation
It’s already worse for Generation X, Millennials and Generation Z (those new to the workforce and younger) who lost the ability to inherit an RIA or 401(k) and stretch out the distribution and thus the taxes over their lifetime. Now, these accounts must be liquidated within 10 years of inheritance. The distributions whether in a lump sum or over 10 years are added to regular income. Consider someone inheriting dad’s IRA while in their peak earning years and a greater percentage of the RIA is going to Uncle Sam in taxes.
What’s Needed?
With inflation, college debt, stagnant pay or lack of stability in the workplace, what is going to be needed by those in the work class is money. So many people live paycheck to paycheck and are stressed about money. A recent study indicated that just an extra $900 per month would really ease the burdens and stress financially.
The ability to leave beneficiaries tax free money that can ease their burdens and give them a leg up has caused second to die life insurance to deserve serious consideration. While a policy worth millions of dollars is still needed for very large estates, we’re seeing 2nd to die policies purchased for $500,000 and below. This amount will pay the taxes on soon to be inherited IRAs and other tax obligations that will come into play when the second spouse passes.
Is 2nd To Die Life Insurance a Necessity?
Frankly, it’s a luxury. One might have an attitude of “my kids will get whatever is left over. It’s better than nothing.” And one might easily see the validity on this approach, but many others have the attitude, “I’d rather pass more money to my family than Uncle Sam” and do some estate planning.
Make sure a will and powers of attorney are established. Check the beneficiary status of accounts. Consider how various accounts are passed from one generation to the next, the taxation of those accounts and breakdown who gets what are all good first steps. If the need or desire is equal out inheritance money or provide money to pay taxes, a life insurance policy, perhaps 2nd to die, is a viable solution.