When planning for the future, life insurance is a key component of a well-rounded financial strategy. One type that often goes unnoticed is second-to-die life insurance, or survivorship life insurance. In simple terms, second-to-die insurance is a policy that covers two individuals, typically a married couple, and only pays out when the second person passes away.
This unique policy can be an ideal option for those looking to leave a legacy, support their heirs, or manage estate taxes.
Understanding Estate and Inheritance Taxes: What Your Children May (or May Not) Owe
When planning your estate, it’s important to understand how taxes may affect what your children inherit. While federal estate taxes often make headlines, state-level estate and inheritance taxes can be just as impactful — and sometimes more so.
The federal estate tax is often misunderstood. The estate itself — not the heirs — is responsible for paying any federal estate tax before assets are distributed. As of 2025, the federal estate tax exemption is $13.61 million per person, or $27.22 million for married couples. This means that if a parent’s estate is valued below these thresholds, no federal estate tax is due. However, for estates that exceed the exemption, the amount above the limit is taxed at rates up to 40%. In 2026, the exemption will be $15 million per person.
Consider a couple with a $20 million estate in 2026. Because the exemption for a married couple is $27.22 million, or $30 million in 2026, their estate would not owe any federal estate tax in 2026. If the couple passes away in 2035 with an appropriate rate of return of 5% on their $20 million estate, their estate could face federal estate tax on the $2,577,893 million excess — potentially resulting in a tax bill of up to over $1 million.
Even if a family avoids federal taxes, state-level estate or inheritance taxes may still apply. Several states impose their own taxes, often with much lower exemption amounts — typically between $1 million and $5 million. Estate taxes are paid by the estate before distribution, while inheritance taxes are paid by the beneficiaries after receiving assets.
States like New York, Massachusetts, and Oregon levy estate taxes. Meanwhile, Maryland and New Jersey impose inheritance taxes, and Pennsylvania charges 4.5% inheritance tax on assets passed to children.
For instance, a couple in Pennsylvania with a $5 million estate would not owe federal estate tax due to the high exemption. However, their children would owe 4.5% in state inheritance tax — totaling $225,000 — simply because of Pennsylvania’s tax rules. If the beneficiary is a non-family member (e.g., friends, unmarried partners, distant relatives) pay 15% on the value of what they inherit. This applies to most assets including real estate, cash, investments, and personal property. For example, if a Pennsylvania resident leaves $500,000 to a close friend, the friend pays 15%, or $75,000, in inheritance tax. And the tax is due within 9 months of the decedent’s death.
Inheritance taxes — where heirs pay directly — are relatively rare, but they do exist in a handful of states: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. In most of these states, spouses and direct descendants like children and grandchildren either pay no tax or benefit from reduced rates. Other beneficiaries could have to pay inheritance taxes. For example, a resident of New Jersey who leaves a $2 million estate to a niece. Because New Jersey imposes inheritance tax on non-lineal heirs, the niece could face a tax rate of up to 16%, resulting in a tax bill of $320,000. Had the estate been left to a child or spouse, the tax may have been significantly reduced or eliminated.
Understanding these rules can help you plan more effectively and avoid surprises for your heirs. If your estate may be subject to federal or state taxes, consider strategies like gifting, trusts, or charitable giving to reduce the taxable amount or a second to die life insurance policy to provide tax free money to cover the taxes.
How Does Second-to-Die Life Insurance Work?
With second-to-die life insurance, the policy is designed to cover two people. The key difference here is that the death benefit is not paid when the first person dies. Instead, it is paid after the second person passes away. This delay can make it a cost-effective option for those who want to minimize premiums while still providing a financial benefit to their beneficiaries.
The policy is typically used for estate planning purposes. Many people purchase second-to-die life insurance to help cover estate taxes, so their heirs do not have to sell assets or take on debt to settle the estate. Because both individuals are insured under the same policy, it tends to have lower premiums than two individual life insurance policies.
Benefits of Second-to-Die Life Insurance
Unlike traditional life insurance policies that pay out upon the death of one insured individual, second-to-die policies pay the death benefit only after both insured individuals have passed away. This structure allows insurers to take on less risk, which typically results in lower premiums. Even if one spouse has health issues, the impact on the premium is often minimal compared to insuring two healthy individuals separately.
One of the most compelling uses of second-to-die insurance is as an estate planning tool. For families concerned about the taxes their heirs may face, this type of policy can provide a tax-free death benefit that helps cover estate taxes. Without such a provision, heirs may be forced to sell inherited property or investments — potentially in a down market — to settle the estate. This can be especially problematic when the assets are illiquid or emotionally significant, such as a family home or business.
Beyond taxes, second-to-die insurance can play a vital role in legacy preservation. It allows parents or grandparents to leave a meaningful inheritance to children, grandchildren, or even charitable organizations. For example, if one child chooses a career path that makes it difficult to save adequately for retirement, a tax-free death benefit could help bridge that gap. In another scenario, if one child is expected to take over the family business, the policy can be used to “equalize” the inheritance for the other children, ensuring fairness without disrupting the business.
For couples who are passionate about philanthropy, second-to-die life insurance offers a unique and powerful way to leave a lasting legacy. Because the policy pays out only after both insured individuals have passed away, it allows for long-term planning and can be structured to benefit charitable organizations in a tax-efficient manner.
There are also notable tax advantages. The proceeds from a second-to-die policy are generally income tax-free to beneficiaries. When structured properly — such as within an irrevocable life insurance trust (ILIT) — the death benefit can also be excluded from the estate for estate tax purposes. This makes it a powerful tool for high-net-worth families seeking to reduce their taxable estate while still providing for their heirs.
Conclusion
While second-to-die life insurance can be a powerful estate planning tool, it’s not suitable for everyone. It’s important to evaluate whether it aligns with your long-term financial goals and family dynamics. Age and health are key considerations — although premiums are generally lower than individual policies, insurers still assess both individuals. Once couples reach their 70s, health issues may make approval more difficult or premiums less favorable. Additionally, if your estate is modest and not subject to estate taxes, this type of policy may not be necessary. It’s best suited for those planning to pass on significant wealth or facing potential estate tax exposure.
Another important factor is the long-term commitment required. Because the policy pays out only after both insured individuals have passed away, it’s a decision that can shape your estate strategy for decades. Couples should be confident in their ability to maintain premium payments over time, as lapsing on the policy could result in losing the intended benefit altogether.
Common pitfalls include underestimating the impact of changing estate laws, failing to properly structure the policy within a trust (such as an ILIT), or overlooking the importance of regularly reviewing the policy as family circumstances evolve. Some families also mistakenly assume the policy will solve all estate planning challenges, when in reality it should be part of a broader strategy that includes wills, trusts, and tax planning.
Second-to-die life insurance is ideal for couples who want to preserve their estate, minimize the financial burden on heirs, or leave a charitable legacy. Whether it’s helping a child with limited retirement savings, equalizing inheritance among siblings, or funding a philanthropic cause, this type of insurance offers a flexible and tax-efficient way to protect your legacy. Before making any decisions, it’s wise to consult with a financial advisor to determine how this strategy fits into your overall financial plan.
Bronwyn Martin is a Financial Advisor with Martin’s Financial Consulting Group a financial advisory practice of Ameriprise Financial Services LLC in Kennett Square. She specializes in fee-based financial planning and asset management strategies and has been in practice for 25 years.
