Addressing the life insurance needs of clients who run small family-owned businesses is challenging. Often, those needs can’t be served by turning to the traditional second-to-die joint life insurance policies that many married couples favor. In many cases, the surviving spouse is an inactive partner in the business who may need substantial assistance in continuing or liquidating the business, or simply covering living expenses. While the second-to-die joint policy is still useful, as it provides liquidity for estate tax purposes, it simply does not address the problems of the modern family business. Adding a first-to-die rider can give your business clients the security they need, so that the business and family finances are protected if the primary business manager is the first to die.
Second-to-Die or “Survivorship” Joint Life Insurance
Typically, a second-to-die joint life insurance policy, or “survivorship policy,” provides insurance on the lives of two people, but the benefits do not pay out until the death of the second insured. The policies are often used by married couples to provide death benefits to their children after the death of the second parent. This provides the children with the liquidity they need to pay estate taxes and other expenses associated with liquidating their parents’ assets.
These policies can be much less expensive than purchasing two separate policies on the parents’ lives, because the insurance company knows that the benefits will likely be paid much later than with a traditional single-person policy. It also may be easier for a couple to purchase a joint policy if there is a substantial age disparity between the spouses, because the premiums are based on their average age.
While a second-to-die joint insurance policy is usually a better option than purchasing two separate life insurance policies, it may not be the best option for every client. No funds are paid until after both insured parties have died, so it’s an unattractive option for clients who anticipate financial need after the death of the first insured.
Benefits of a First-to-Die Rider
Modern joint life insurance policies can now solve the problems presented by second-to-die joint life insurance by offering optional first-to-die riders within the second-to-die joint life insurance policy, so that a portion of the proceeds is paid upon the death of the first insured, and the remainder paid after both have died.
For a married couple, a first-to-die rider is useful in two-income families where each spouse relies upon the other for income, or in situations where the surviving spouse may need help paying debts or taxes after the first spouse has died. If the couple owns a family business, a first-to-die rider may be essential to securing the business if the primary business manager dies first, because it will provide the cash necessary to sustain the company while the surviving spouse determines how (and whether) to continue the business.
First-to-die riders are also useful in protecting partners in small businesses that are not family owned, and can be much less expensive than a traditional policy if there is an age disparity between business partners because, again, the ages of the two parties are averaged. The riders are especially valuable in buy-sell arrangements—the surviving partners can use the proceeds that are paid pursuant to the first-to-die rider to purchase the decedent’s share of the business from her estate.
Modern life insurance products are evolving to ensure that the specific needs of your client are addressed. The use of a first-to-die rider in connection with a second-to-die joint life insurance policy is just one of the ways in which a policy can be tailored to a client’s individual situation.
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