Powerful uses of a first-to-die rider on a second-to-die life insurance policy
By Roccy Defrancesco
The Wealth Preservation Institute
Don’t you believe that a second-to-die policy with a first-to-die rider would be of interest to new clients or to ones who are funding second-to-die policies in an ILIT?
Those who traditionally buy second-to-die life insurance policies are married couples who want a death benefit to pass to their heirs at the death of the second parent. The policy is usually owned by an irrevocable life insurance trust.
Why buy a second-to-die policy?
The cost. When buying a policy strictly for the death benefit, the goal is to buy the policy that costs the least. Because the insurance company actuarially knows with a second-to-die policy that the death benefit will pay off years later than a non-second-to-die, the cost for the policy can be significantly less.
How many trustees of ILITs wish they had a policy that paid before the second parent’s death? A lot.
It’s great that parents buy life insurance policies in ILITs to pass wealth to their children or other heirs upon death. However, times have changed; and there are thousands of ILITs with second-to-die policies in them where the beneficiaries could use the money before the second parent’s death.
Until the advent of second-to-die policies with first-to-die riders, the only option an ILIT had to provide a death benefit at the first parent’s death was to surrender the second-to-die life policy and buy two policies on both parents (which is expensive and one parent may no longer be insurable). (The product I'm discussing will underwrite the policy even if one insured is totally uninsurable.)
First-to-die rider to the rescue
With a simple 1035 exchange to a second-to-die rider policy that has a first-to-die rider, you can take a second-to-die policy that never had an ability to pay a death benefit at the first insured’s death and instantly turn it into a policy that will. I’d like to make myself sound smart by making this really complicated, but it’s such a simple and yet powerful concept that I can’t.
Don’t you believe that a second-to-die policy with a first-to-die rider would be of interest to new clients or to ones who are funding second-to-die policies in an ILIT? Just find one and ask them if they would prefer a policy with a first–to-die rider and ask them what they think. I think you’ll be pleasantly surprised.
You have a married couple both age 65, one who is rated as standard and the other as preferred for underwriting. The goal is a sizable death benefit to be passed to the heirs upon death. Normally they would have purchased a traditional second-to-die policy in an ILIT. Assume the couple wants a $2.5 million dollar death benefit, to pass to the heirs upon their death. While there’s nothing wrong with that, the question is whether they would be more interested in a policy that has a $500,000 death benefit at the first parent’s death (whenever that occurred) and then a $2 million dollar death benefit that will pay at the second spouse’s death.
I assume the couple would be very interested in a policy that paid part of the death benefit early so the children didn’t have to wait for the second parent to die to receive any amount of the death benefit.
It should be noted that the first-to-die rider policy will have a premium that is slightly higher than one that doesn’t. This makes sense in my example because I have the exact same death benefit and because there is the potential for the insurance company to pay part of it years earlier in the event of the onset of a serious injury or accidental death.
Other applications of the first-to-die rider: buy/sell agreements
Just about every buy/sell agreement should have life insurance on the owners so that when one dies the others have the money to buy him/her out.
Think of a classic two-owner business where one owner is 10 years older than the other. The younger owner buys insurance on the older owner and vice versa. The problem is that the premium on the older owner is significantly higher, and the younger owner gets the short end of the stick when it comes to buying that policy.
With the first-to-die rider on a second-to-die policy, the partners can buy one policy insuring both their lives knowing that at the first first owner’s death a nice death benefit will be paid. Because second-to-die policies mainly underwrite based on the younger and usually healthier insured, the cost will be much less than buying two separate policies.
If you are selling death benefits to parents who are looking to pass wealth to the next generation, don’t just default to using a second-to-die policy. Introduce a second-to-die policy with a first-to-die rider, and I think you’ll be pleasantly surprised at the response.
Also, if you want to pick up several sales of these types of polices, find clients who have ILITs with traditional second-to-die policies in them and suggest that they look at 1035 exchanging the policies for a policy with a first-to-die rider. I think you’ll have significant success with this approach.