What is a Survivorship Universal Life Insurance Policy?
Survivorship universal life insurance, also known as second-to-die life insurance, is a type of permanent life insurance policy that covers two individuals, typically a married couple. The policy pays out a death benefit only after the second insured person passes away. This type of policy is often used for estate planning purposes, as it can help to cover estate taxes or provide a lump sum of money to beneficiaries after both spouses have passed away.
Key Features of Survivorship Universal Life Insurance
Survivorship universal life insurance policies offer several key features that make them attractive to certain individuals and families:
- Death Benefit Paid Upon Second Death: The policy’s death benefit is only paid out after the second insured person passes away. This means that the policy will remain in effect until both individuals have died.
- Flexibility and Customization: Like traditional universal life insurance, survivorship universal life policies offer flexibility in terms of premium payments and death benefit amounts. Policyholders can adjust their premiums and death benefit to meet their changing needs.
- Cash Value Accumulation: Survivorship universal life insurance policies build cash value over time, which can be accessed through withdrawals or loans. This cash value can be used for various purposes, such as supplementing retirement income or paying for unexpected expenses.
- Estate Planning Benefits: Survivorship universal life insurance can be a valuable tool for estate planning. The death benefit can help to cover estate taxes, ensuring that the beneficiaries receive the full value of the estate.
How Survivorship Universal Life Insurance Works
Survivorship universal life insurance policies work similarly to traditional universal life insurance policies, but with a key difference: the death benefit is paid out only after the second insured person passes away. Here’s a breakdown of how it works:
- Policy Application and Underwriting: The policy application process involves providing information about both insured individuals, including their health history and lifestyle. The insurer will then assess the risk and determine the premium rates.
- Premium Payments: Policyholders make regular premium payments to maintain the policy. These premiums are used to cover the cost of insurance and to build cash value.
- Cash Value Accumulation: A portion of the premium payments is allocated to the policy’s cash value account. This cash value grows over time, earning interest at a rate determined by the insurer.
- Death Benefit Payment: When the second insured person passes away, the policy’s death benefit is paid out to the designated beneficiaries. The death benefit amount is typically a fixed sum, but it can also be adjusted over time.
Benefits of Survivorship Universal Life Insurance
Survivorship universal life insurance offers several benefits for individuals and families, including:
- Estate Tax Planning: The death benefit can help to cover estate taxes, ensuring that the beneficiaries receive the full value of the estate. For example, a couple with a large estate may purchase a survivorship universal life insurance policy to cover the potential estate tax liability upon the death of the second spouse.
- Financial Security for Survivors: The death benefit can provide financial security for the surviving spouse, helping to cover expenses such as living costs, medical bills, or debt repayment.
- Flexibility and Customization: Policyholders can adjust their premiums and death benefit to meet their changing needs. This flexibility allows them to tailor the policy to their specific circumstances.
- Cash Value Accumulation: The cash value component of the policy can be used for various purposes, such as supplementing retirement income or paying for unexpected expenses.
Considerations for Survivorship Universal Life Insurance
While survivorship universal life insurance can be a valuable tool for estate planning and financial security, it’s important to consider the following factors before purchasing a policy:
- Cost: Survivorship universal life insurance policies are typically more expensive than traditional life insurance policies. This is because the policy covers two individuals and the death benefit is paid out only after the second person passes away.
- Complexity: Survivorship universal life insurance policies can be complex, and it’s important to understand the terms and conditions before purchasing a policy. It’s advisable to consult with a financial advisor or insurance professional to ensure that the policy meets your specific needs.
- Investment Risk: The cash value component of the policy is subject to investment risk. The insurer may invest the cash value in various assets, and the returns on these investments can fluctuate.
Examples and Case Studies
Here are some examples of how survivorship universal life insurance can be used:
- Estate Tax Planning: A couple with a large estate may purchase a survivorship universal life insurance policy to cover the potential estate tax liability upon the death of the second spouse. The death benefit can be used to pay the estate taxes, ensuring that the beneficiaries receive the full value of the estate.
- Business Succession Planning: A business owner may purchase a survivorship universal life insurance policy to provide funds for the business to buy back the deceased owner’s shares from their heirs. This can help to ensure a smooth transition of ownership and prevent the business from being disrupted.
- Financial Security for Survivors: A couple with young children may purchase a survivorship universal life insurance policy to provide financial security for the surviving spouse and children in the event of both parents’ deaths. The death benefit can be used to cover expenses such as living costs, education, and medical bills.
Conclusion
Survivorship universal life insurance can be a valuable tool for estate planning and financial security. It offers a death benefit that is paid out only after the second insured person passes away, providing a lump sum of money to beneficiaries. However, it’s important to carefully consider the cost, complexity, and investment risk before purchasing a policy. Consulting with a financial advisor or insurance professional can help you determine if survivorship universal life insurance is the right choice for your specific needs.