Variable survivorship life insurance, also known as second-to-die or last-to-die life insurance, is a type of insurance policy that covers two individuals and pays out a death benefit only after both people have passed away. This insurance can include a living benefit rider, allowing access to a portion of the death benefit in the event of a terminal illness.
Policyholders can invest premiums in separate accounts, offering potential growth based on market performance. The policy is considered a security due to its investment component and is regulated by the Securities and Exchange Commission.
Variable Survivorship Life insurance is more affordable than single-insured policies, as premiums are based on the joint life expectancy of the insured parties.
It provides liquidity for estates, helps cover taxes, and offers flexibility in adjusting premiums and death benefits during the policy’s life. While it may not suit everyone, it can be valuable for those seeking joint coverage and estate planning benefits.
How Does Variable Survivorship Life Insurance Work?
Variable Survivorship Life Insurance includes a living benefit rider that allows access to a portion of the death benefit in cases of terminal illness.
Policyholders can invest premiums in separate accounts, offering potential growth based on market performance. The policy has a cash value component where a portion of each premium payment is set aside to be invested by the policyholder, who bears all investment risk.
Premiums are determined by the joint life expectancy of the insured parties, making this insurance more affordable than single-insured policies. Variable Survivorship Life Insurance provides liquidity for estates, helps cover taxes, and offers flexibility in adjusting premiums and death benefits during the policy’s life. It is considered a security due to its investment component and is regulated by the Securities and Exchange Commission.
What Variable Survivorship Life Insurance Doesn’t Cover?
Variable Survivorship Life Insurance does not cover deaths due to suicide within the first two or three years of the policy, criminal activity, fraud, or risky activities like skydiving or bungee jumping.
It also does not provide benefits after only one of the insured individuals passes away, as the death benefit is paid out only after both have died.
Additionally, these policies involve investment risks borne by the policyholder, as a portion of each premium payment is set aside for investment opportunities chosen by the policyholder, exposing them to market fluctuations and potential losses.
It’s important to note that while this type of insurance offers unique benefits such as cost savings and estate planning advantages, it also comes with complexities and risks that individuals should carefully consider before purchasing a policy.
Who Needs Variable survivorship life insurance?
Variable survivorship life insurance is beneficial for various individuals, including:
- Couples with children: This insurance can provide financial support for children after both parents have passed away.
- Couples with sizable estates: It helps cover estate taxes and ensures assets are preserved for beneficiaries.
- Couples where one spouse is healthy and the other has a preexisting condition: It offers coverage despite health differences between partners.
- Business partners: It can be used to protect business interests and provide financial security in the event of the partners’ passing.
These individuals can benefit from the joint coverage, estate planning advantages, and potential investment growth offered by Variable Survivorship Life Insurance. However, it’s crucial to consult with a financial advisor to determine if this type of insurance aligns with their specific financial goals and circumstances.
Benefits of Variable Survivorship Life Insurance
Some of the benefits of second-to-die life insurance include:
- Estate Planning Benefits: This insurance offers advantages for estate planning by providing financial support to heirs and beneficiaries, ensuring estate taxes and other expenses are covered after the death of both insured individuals.
- Tax Advantages: Second-to-die life insurance provides tax benefits, helping policyholders manage their tax liabilities and preserve their assets for beneficiaries.
- Investment Opportunities: Policyholders can invest premiums in separate accounts, potentially leading to higher cash value growth based on market performance, offering a long-term investment strategy.
- Flexibility: These policies typically involve flexible premium payments, allowing policyholders to adjust the amount and frequency of premiums within certain limits based on their financial situations and objectives.
- Cost Savings: Premiums for second-to-die life insurance are often cheaper than individual policies due to being based on the joint life expectancy of the insured parties, making it a more cost-effective option for some individuals.
- Simplified Qualification Process: It is easier to qualify for a survivorship life policy compared to single-insured life insurance, as underwriting is less stringent due to both policyholders needing to pass away before benefits are paid.
Above all, it provides a larger death benefit compared to individual life insurance policies for the same premium amount, making it potentially more cost-effective.
FAQs
Who typically buys variable survivorship life insurance?
Variable survivorship life insurance is often purchased by couples with estate planning needs, such as providing liquidity to pay estate taxes, funding trusts, or leaving an inheritance to heirs. It can also be used in business succession planning.
What are the potential drawbacks?
The cash value of the policy is subject to market fluctuations, so there is a risk of loss if the investments perform poorly. Additionally, policyholders must pay close attention to the policy’s performance and may need to adjust their investment allocations over time.
Can the policy be customized?
Yes, policyholders can often customize their second-to-die life insurance policies by choosing from a variety of investment options offered by the insurance company. They can also adjust the death benefit and premium payment schedule to suit their needs.
Is variable survivorship life insurance suitable for everyone?
No, variable survivorship life insurance may not be suitable for everyone. It is typically recommended for couples with substantial assets and estate planning concerns. Individuals should consult with a financial advisor or insurance professional to determine if it aligns with their financial goals and needs.
Are there any tax implications?
The death benefit paid out to beneficiaries is generally income tax-free. However, the cash value accumulation within the policy may be subject to income tax if withdrawn or surrendered, especially if the policy has been funded beyond certain limits. It’s important to consult with a tax advisor for personalized guidance.
