Variable Survivorship Life Insurance: Definition, Benefits, Drawbacks, and Considerations
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Summary:
Variable survivorship life insurance covers two individuals and pays a death benefit only after both have died, with options for living benefits. This article explores its workings, benefits, drawbacks, and considerations for potential buyers.
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Understanding variable survivorship life insurance
Variable survivorship life insurance, also referred to as “survivorship variable life insurance” or “last-survivor life insurance,” is a distinctive type of insurance policy crafted to cover the lives of two individuals simultaneously. Unlike traditional life insurance policies that pay out a death benefit upon the demise of a single insured person, variable survivorship life insurance disburses its death benefit only after both individuals covered by the policy have passed away. This dual-life coverage aspect makes it a strategic option for couples or business partners seeking to safeguard their shared financial interests.
Investment component
A fundamental feature shared with other variable life insurance policies is the inclusion of a cash value component within variable survivorship life insurance. With each premium payment, a portion is designated to this cash value component, which is then earmarked for investment opportunities chosen by the policyholder. This investment component offers policyholders the potential for increased returns over time, but it also exposes them to investment risks. The policyholder assumes full responsibility for managing and bearing the associated risks of these investments. Typically, insurers provide a diverse array of investment options, ranging from mutual funds to equities, allowing policyholders to tailor their investment strategy according to their risk tolerance and financial goals.
Regulation and flexibility
Due to its investment component, variable survivorship life insurance falls under the regulatory purview of the Securities and Exchange Commission (SEC). This regulatory oversight ensures compliance with securities laws and regulations, providing policyholders with a level of protection and transparency regarding their investments. Additionally, a variant of variable survivorship life insurance known as “variable universal survivorship life insurance” offers enhanced flexibility. This variation allows policyholders the ability to adjust premiums and death benefits throughout the policy’s duration, providing greater adaptability to changing financial circumstances and life situations.
Investment options
- Equity funds: These funds invest primarily in stocks, offering the potential for high returns but also carrying higher volatility and risk.
- Bond funds: Bond funds invest in fixed-income securities such as government or corporate bonds, providing more stable returns compared to equity funds but with lower growth potential.
- Balanced funds: Balanced funds allocate investments across both stocks and bonds, aiming to achieve a balance between growth and income while managing risk.
- Index funds: Index funds replicate the performance of a specific market index, such as the S&P 500, providing broad market exposure with lower management fees.
- Global or international funds: These funds invest in stocks and bonds from international markets, offering diversification beyond domestic markets but also exposing investors to currency and geopolitical risks.
- Sector funds: Sector funds focus on specific industries or sectors, such as technology, healthcare, or energy, providing targeted exposure to areas of the market expected to outperform.
- Money market funds: Money market funds invest in short-term, low-risk securities such as Treasury bills and commercial paper, offering stability and liquidity but typically lower returns.
- Variable annuities: Some variable survivorship life insurance policies may offer variable annuities as investment options, providing a combination of investment growth potential and guaranteed income payments in retirement.
Real-life scenarios
To illustrate the practical applications of variable survivorship life insurance, consider the following scenarios:
- Estate planning: A wealthy couple wants to maximize the value of their estate for their heirs while minimizing estate taxes. They purchase a variable survivorship life insurance policy, which allows them to leverage the policy’s death benefit to provide a tax-free inheritance to their beneficiaries, ensuring their legacy and wealth transfer goals are met.
- Business succession: A family-owned business wants to ensure continuity and financial security for future generations. The owners purchase a variable survivorship life insurance policy, naming the business as the beneficiary. In the event of their deaths, the policy’s death benefit provides liquidity to fund the buyout of the deceased owners’ shares, facilitating a smooth transition of ownership and ensuring the business’s continuity.
Tax implications and estate planning considerations
It’s important for policyholders to consider the potential tax implications and estate planning considerations associated with variable survivorship life insurance. While the death benefit is typically received income tax-free by the policy’s beneficiaries, any withdrawals or loans taken against the policy’s cash value may be subject to income tax and penalties if not managed properly. Additionally, policyholders should work closely with their financial advisors and estate planners to ensure the policy aligns with their overall estate planning goals and strategies, taking into account factors such as estate tax liabilities, asset protection, and legacy planning objectives.
The bottom line
Variable survivorship life insurance offers a unique way to provide financial protection for couples, with potential benefits in terms of cost savings, estate planning, and investment opportunities. However, it’s essential to consider the investment risks and regulatory aspects associated with these policies before making a decision.
Frequently asked questions
How does variable survivorship life insurance differ from traditional life insurance?
Variable survivorship life insurance covers two individuals and pays out a death benefit only after both have passed away, making it distinct from traditional policies that pay upon the death of a single insured individual.
Can I access the cash value of a variable survivorship life insurance policy during my lifetime?
Some policies offer living benefits through a living benefit rider, providing access to a portion of the death benefit in the event of a terminal illness as defined in the policy.
What are the investment options available within variable survivorship life insurance?
Insurers typically offer a range of investment options, allowing policyholders to choose where to allocate their cash value investments.
How does the premium of variable survivorship life insurance compare to traditional single-insured policies?
Premiums for survivorship policies are determined by the joint life expectancy of the insured parties, often resulting in lower premiums compared to individual policies.
Is variable survivorship life insurance subject to regulatory oversight?
Yes, variable survivorship life insurance is considered a security due to its investment component and is regulated by the Securities and Exchange Commission (SEC).
Key takeaways
- Variable survivorship life insurance covers two individuals and pays a death benefit only after both have died.
- Policies may offer living benefits through a living benefit rider.
- Investment component allows policyholders to allocate premiums into separate accounts.
- Regulated by the Securities and Exchange Commission due to its investment nature.
- Considered a more cost-effective option compared to individual policies for some individuals.
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