Variable Survivorship Life Insurance

Variable survivorship life insurance, also known as second-to-die variable life insurance, is a form of permanent life insurance policy that covers two individuals, typically spouses. The death benefit is only paid out after both individuals have passed away. This insurance product combines the features of survivorship life insurance and variable life insurance, providing not only lifetime coverage but also investment opportunities that can potentially grow in value over time.

Key Features

Dual Coverage and Payout

Variable survivorship life insurance is designed to insure two people under one policy. The notable feature is that the death benefit is not disbursed until the second insured individual dies. This makes it a strategic choice for estate planning and wealth transfer.

Investment Component

Like other variable life insurances, policyholders can invest the premiums into various sub-accounts, which function similarly to mutual funds. These sub-accounts can include stocks, bonds, and money market instruments, allowing the cash value of the policy to grow based on the performance of these investments.

Flexibility

This type of policy offers considerable flexibility in terms of premium payments and death benefits. Policyholders can usually adjust their premium payments and death benefit as their financial situation or goals change.

Tax Advantages

Death benefits from life insurance policies are generally tax-free to beneficiaries, and the cash value accumulation grows on a tax-deferred basis. This makes it an efficient vehicle for estate planning and wealth transfer.

Advantages

Lower Premiums

Since the death benefit is only paid out after both insured individuals have passed away, premiums tend to be lower compared to individual policies providing the same total coverage.

Estate Planning Benefits

This kind of policy is often used in estate planning to cover estate taxes or to provide a significant inheritance for beneficiaries. Because the death benefit is delayed until the second death, it can be optimally timed to meet estate settlement needs.

Investment Growth Potential

With access to a variety of investment options, the cash value component of the policy offers the potential for significant growth over time. This can help in accumulating a larger amount for beneficiaries or for policy loans and withdrawals during the policyholders’ lifetimes.

Loan and Withdrawal Choices

Policyholders have the option to take loans or withdrawals from the cash value of the policy, which can provide financial flexibility in times of need.

Disadvantages

Investment Risk

The cash value in the policy is subject to market risks. Poor investment performance can lead to reduced cash value and possibly higher premiums to maintain the insurance coverage.

Complexity

Variable survivorship life insurance policies are more complex compared to term or whole life insurance. Managing the investment component requires a good understanding of financial markets and investment principles.

No Immediate Death Benefit

Since the death benefit is not paid until the second insured’s death, the policy does not provide financial support upon the first insured’s death. This might be a drawback for families needing immediate funds after the first death.

Policy Management

Regular monitoring and possibly adjusting the investment allocations within the policy require effort and knowledge. Policyholders might need advisory services, adding to the cost of maintaining the policy.

Customization Options

Riders

Riders are additional provisions that can be added to a life insurance policy to provide extra benefits or protection. Common riders in variable survivorship life insurance include:

Investment Options

Most policies offer a wide range of sub-accounts, allowing policyholders to diversify their investments across various asset classes. Regular reviews and adjustments can optimize the growth of the cash value.

Death Benefit Options

Policyholders can choose between a level death benefit, which remains the same over time, or an increasing death benefit, where the death benefit may increase based on the performance of the investment component or by a predetermined amount.

Use Cases

Estate Tax Planning

One of the primary uses of variable survivorship life insurance is to efficiently cover federal and state estate taxes, ensuring that heirs are not forced to liquidate assets. The delayed death benefit payout aligns well with the timing of estate tax liabilities.

Special Needs Children

Families with special needs dependents often use this policy to ensure long-term financial security for their dependents. Since the death benefit is only paid after the second parent’s death, it guarantees prolonged support.

Pension Maximization

For retirees with pension plans, this policy can offer a strategic advantage. By electing a higher pension payout that is typically reserved for single-life payouts, retirees can use a portion of this higher income to fund a variable survivorship life insurance policy, ensuring their spouse will still receive financial support after their death.

Considerations Before Purchase

Financial Objectives

Determining the primary financial objectives, such as estate tax planning, wealth transfer, or long-term care funding, is crucial. This will help in deciding whether variable survivorship life insurance aligns with the overall financial plan.

Comfort with Investment Risk

Understanding one’s risk tolerance is important as the investment component of the policy can lead to fluctuating cash values. Those less comfortable with investment risks might opt for more conservative investment options within the policy.

Health and Age

The collective health and age of the insured individuals will influence the premium costs. Generally, healthier and younger individuals might benefit from more favorable premium rates.

Consultation with Financial Advisors

Due to the complexity of this product, consulting with financial advisors who specialize in life insurance and estate planning can provide valuable insights and ensure that the policy choice aligns with the financial goals.

Example Companies Offering Variable Survivorship Life Insurance

Conclusion

Variable survivorship life insurance is a strategic financial product offering dual life coverage with an investment component, used mainly for estate planning and wealth transfer. While it offers lower premiums and the potential for cash value growth, it also comes with investment risks and complexities that require careful consideration and management. Consulting with financial advisors and thoroughly understanding personal financial goals are crucial steps before purchasing this type of policy.