Most Americans know their families need life insurance. We’ve all heard of term and whole life insurance because they are the most popular and frequently discussed types of coverage available, but what about other, specific kinds of policies? And which form of life insurance or rider is best suited for high-income earners and self-employed individuals, such as business-owners, physicians, lawyers, dentists, and other professionals?
For example, survivorship life insurance is most commonly used to insure married couples or business partners because it provides coverage for two individuals for a lower cost than two separate life policies. There are two types of survivorship policies: first to die and second to die. Survivorship coverage is available in term life insurance, whole, and modified whole.
What Is A First To Die Life Insurance Policy?
A first to die life insurance policy pays the death benefit when the first insured policyholder dies. It can be used by business partners to provide funds for the surviving partner to buy out the deceased partner's business interest and cover other expenses that may arise from a partner's death. This can be especially useful since many physician and dental groups form partnerships or LLPs. Meanwhile, married couples may use first to die survivorship life insurance to provide the surviving spouse with money for living expenses that may arise after the first partner dies.
Although this structure is very similar to a traditional term life insurance policy, the difference is that both partners or spouses are covered under one policy. This is cheaper than purchasing 2 individual policies and can be beneficial if one policyholder may be independently uninsurable.
What Is A Second To Die Life Insurance Policy?
On the other hand, second to die life insurance does not pay the death benefit until the second insured person dies. This type of policy may be used by affluent couples as a hedge against estate taxes for their heirs. The death benefit is separate from the estate and is not subject to estate or income tax. [Editor's Note: The policy cannot be owned by the insured if you want the benefit to be estate tax-free.] An inheriting spouse does not have to pay estate taxes so estate taxes are only due after the death of the second spouse. Family owned businesses also use second to die survivorship life insurance to provide funds to cover taxes and other liquidity needs in the event of death.
Advantages of Second to Die Policy
As we briefly mentioned before, it is less expensive to insure two individuals under a survivorship policy than to buy two separate life policies. In cases where one spouse or partner may not be able to get life insurance due to a health condition, age or hazardous occupation, it may be possible to get a survivorship life insurance policy.
Survivorship life insurance provides affordable coverage for two individuals and is a useful tool in estate planning for married couples and privately-held businesses anticipating significant estate taxes. However, beware that estate taxes in 2014 do not apply for individuals gifting less than $5,340,000, a $90,000 increase from 2013’s limits, or couples with taxable assets of up to $10.68 million. For all other upper and middle class Americans, the benefits are limited to affordability and insurability.
Disadvantages of Second to Die Policy
Since first to die policies are terminated when the death benefit is paid, the surviving partner is left without life insurance and may have to purchase a new policy. Second to die protection is not a good choice if the surviving partner, a physician’s stay-at-home spouse for example, needs funds from a life insurance benefit to pay living or business expenses when the first partner dies.
If you choose a second to die rider on a whole life policy, the surviving partner can use the cash value as collateral for low interest loans, but the unpaid loan balance is deducted from the death benefit, possibly leaving heirs without enough funds to cover taxes. [Editor's Note: While I suppose it is possible to have this issue, I would think that most people who have $10M+ estates aren't going to find that borrowing from their life insurance policies keeps them from meeting their estate tax burden.]
Term vs. Whole Life Insurance
When purchasing a survivorship rider, you will have to determine which type of policy to add it on to – term or whole life insurance. Whole life policies offer cash value, or forced savings account, with a fixed rate of return, but cost 3 to 10 times more than term insurance. Policyholders can use the cash value during their lifetime as security for loans, and the coverage is permanent, making it a [low-returning-ed] long-term investment. For some individuals, whole life makes sense, but for most, it simply is not a good investment.
Meanwhile, term life insurance is temporary and expires at the end of the specified term, usually between 5 and 30 years, so policyholders may have to renew the policy if they need future coverage. Term life, also known as pure insurance, is the cheapest contract available and should be used to protect you when your life insurance needs are greatest. Most applicants choose a 20 to 30 year policy to last until their retirement, when children are out of the house and they have become financially independent.
Overall, given the cost difference between term vs whole life insurance, we recommend you buy term life insurance, save the difference and invest in an index mutual fund. The typical whole life policy has a long term cash value return in the 3-5% range. The stock market has returned a little over 9% per year, on average, for the last 100 years. Compound that difference over the course of 20 to 30 years, and the difference in your net worth is astronomical.
Modified Whole Life Insurance
Just to be thorough, we will discuss another option: modified whole life insurance. Traditional whole life policies have a fixed premium that never increases, but modified whole life offers a lower initial premium that increases at specified intervals. A modified policy may be a good choice for a growing business [that has a need for a permanent policy-ed] since the increasing income of the business should keep pace with the increases in survivorship insurance premiums.
Young married couples may choose a first to die modified whole life insurance policy since their income is also likely to increase. If you are on a budget and think whole life insurance is the kind you want to purchase, consider a modified payment policy. [Most who want insurance “on a budget” should just buy term.-ed]
Comparison Shopping Gets You The Best Rates
One way to decide if survivorship life insurance is the right choice is to compare the rates and policy terms of different types of policies. There are many websites offering free instant life insurance quotes from multiple insurance companies. Couples and business partners can compare different types of coverage, their respective premiums, and the terms and conditions of each company to find the one that best suits their needs and budget. [However, I have yet to see one of these sites that provides instantaneous quotes without personal information for survivorship policies. You're going to need to meet with an agent if you're interested in these specialized policies.-ed]
Survivorship life insurance can be part of a financial plan that ensures the continuation of a family or business even if a partner dies. Survivorship coverage is not the right choice for every couple or business, but it can be an affordable alternative to buying two separate life insurance policies. Research the pros and cons of first and second to die life insurance to determine if they are right for you.
[Editor’s Note: Gary Dek is a former investment banker and private equity analyst turned personal finance blogger and online marketer. He contributes to MyLifeInsuranceQuotes123.com by providing unbiased life insurance guides for consumers looking for the best coverage. We have no financial conflict of interest.]
What do you think? Do you or your business own a survivorship policy? How come? Do you see a need for one of these in your life? How come? Comment below!
I seems that a second to die policy would be less expensive than an individual policy as both have to die instead of just one, which transfers the risk from the insurance company to the insured. Is that usually the case or does it depend on the insured?
While I wouldn’t purchase any of these, if I were to purchase one, it would be a 2nd to die no lapse gUL. These are available.
Why is it that when a life insurance topic comes up, it is always about term vs whole life? It’s like the people writing these articles have never heard of universal life (non-variable). If someone has a need for permanent life insurance (estate taxes or other reasons), then UL policies are the best way to get low cost permanent life insurance. The cash value may be less than whole life, but if the purpose of the coverage is the death benefit, then whole life is a waste of money. UL policies can be put together to act like a term policy until age 100 or 110 or whatever age you want. If I wanted a large permanent death benefit for the most reasonable cost, it wouldn’t be whole life, it would be UL.
Just curious why UL policies are never discussed. Is everyone just trying to sell expensive whole life policies?
Mike just in case it is clear, I am a physician and don’t sell insurance but you have several statements that need clarification.
First off UL polices can be set to have MORE cash value then whole life polices. This is bc of the methods used to test them for MEC status are different between ULs and WL. You seem to be actually talking about the specific type of UL I mentioned in my post which is a no lapse gUL. These are usually set such that they have minimal cash values. Now whether or not these will provide a better return for the death benefit vs whole life actually depends. If you are using the guaranteed values for both polices then the gUL wins. If using the current illustrated values then it depends on when you die. Lets just say you get the best health rating and we are expecting you to live into your 90s. If you happen to die sooner then the gUL wins again. If you actually some how live to be 121 then likely the WL will have both a higher cash value and a higher death benefit assuming a participating WL from a mutual and used dividends to buy more insurance or if you used it to pay your premiums then the policy likely was self sustaining a long time ago and was even paying you back some dividends. Additionally dividends for WL have been going down for a long time. If one makes the assumption that the interest rate environment goes up and stays up then dividends will greatly improve and someone with a participating WL policy will get that benefit while the person with the no lapse gUL will be locked into their previous pricing.
Finally id argue that NONE of these things are cheap permanent insurance. Permanent insurance is expensive and that’s bc there is no magic in this world. The insurance company invests the money in things we can otherwise invest in but has high costs/fees/commissions. I feel WCI has talked about ULs in particular no lapse gUL and VULs in several of his posts and by some of the guest authors.
Rex,
You say that none of these are “cheap”. What are you comparing to? If you are comparing to term, then it is not a proper comparison. When comparing like products (i.e. permanent insurance), then there are “cheap” options and expensive options. GUL policies and current UL policies are both less expensive options than WL. WL is designed to mature when we reach a certain age (typically 121 for most companies). UL policies are typically designed to provide just enough cash value for the policy to sustain itself until a certain age (i.e. 121, 100 or whatever age you want). As you mentioned, WL can use dividends to increase the death benefit via paid-up additions. UL policies can also be set with an increasing death benefit (although not based on dividends). This increases the premium a bit since the insurance company now has a higher net amount at risk, but it is still less expensive than WL. The whole purpose of WL policies is to have a cash account that matures at a certain age while providing a death benefit. UL policies have a cash value account most often designed just to keep the policy lasting to a certain age. Of course, UL policies can be “over funded” and accumulate significant amounts of cash (this can be done with current UL, indexed, or variable). However, if we are simply comparing the best buy for maximum permanent death benefit without a need for access to cash value, then UL policies reign supreme. When you die, the amount of cash value in the policy means nothing. Your beneficiaries only get the death benefit. Simply put, UL policies can be structured for the same or higher death benefit than WL policies offer and at a lower cost. The age at which you die is irrelevant assuming the death benefits being compared are equal. When the benefits are equal and the UL policy is structured as a low cost/low cash value options, then the UL policy results in a better return at any age.
I dont agree with that. The purpose of WL within the field of permanent insurance (and most people should avoid all permanent insurance in my opinion and again im not in the insurance field) is to have the most guarantees. It is not necessarily to have more cash value. You are making assumptions about the UL to say that it will have a higher death benefit. In particular if you are talking about a current assumption UL, you are assuming the cost of insurance wont go up beyond what it currently is slated to go up. It isnt guaranteed in a current assumption UL. You are also assuming that the return on investments that the insurance company is projecting will be such that the returns are better than the guaranteed collumn in a whole life policy. There is a reason why during some periods of time WL was easier to sell and others when current assumption UL was easier to sell and why agents have been able to get people to switch from one form to another in both directions.
Some how you have the impression that ULs are just cheaper than WL. They are different. I think most docs should avoid all these products but if for some reason one needed it or wanted it then WL has the most guarantees keeping in mind what an insurance company guarantee means. No lapse gUL has the cheapest guaranteed death benefit. VUL has the most risks for the client but possibly the best return as well if done via a lower cost company. Current assumption UL has more risk for the client then WL but not as much as a VUL IUL is really a close cousin to current assumption UL.
What im comparing this to in regards to cheap is having money at your eventual death. A combination of term and investing in low cost index funds is the winner on average and thats bc there is no magic in this world.
I never said that the UL policy will have a higher death benefit. I said that when comparing the same benefit, the UL policy is less expensive because it is typically structured for less cash value. GUL and current UL policies aren’t used primarily for cash value. There are other policies better designed for that purpose. Rather, these policies are best uses to obtain the largest death benefit for the lowest cost. You said current UL costs can go up and aren’t guaranteed. You’re wrong. You’re right that insurance costs can increase, but their is a built in guarantee. WL policies derive most of thier cash value from dividends. Gues what?…dividends aren’t guaranteed. The only thing that is guaranteed is usually around 3%. Some UL policies will guarantee 3%.
The reason why WL policies were easier for insurance agents to sell many years ago is because UL policies were new and limited. This has evolved over time. Today, if someone wants permanent death benefit with the lowest cost, WL is NOT the right choice. You should go out and request illustrations for WL and UL. When you do that, make sure you’re comparing an equal death benefit and see which is less expensive. Then do another comparison with just the same premium amount and see which has the higher death benefit. UL wins in both cases.
While it’s fun to debate stuff like this, the truth is that the vast majority of people neither need, nor want (at least once they understand the cost), a permanent death benefit.
Universal life can be structured in so many different ways, it is difficult to generalize about it. That flexibility is both good and bad, depending on how it is used.
Your example just shows why ULs arent better than WL. When one picks a UL policy that has the same guarantees as a whole life policy then it costs pretty much the same. You can make a UL perform like WL and almost vice versa.
I have such illustrations and no it doesnt always show what you say but in the end neither policy will perform as illustrated, and illustrations require certain assumptions.
There is just no magic in this world. In both situations the insurance company wants to make a profit. They have similar costs and similar investments when offering the same sort of guarantees. You can find one policy to illustrate better than another but you dont know if it will perform better. ULs are not some improved version of permanent life insurance. They are just different. If one wants just the death benefit and we are basing conclusions off guaranteed values only then the UL with low cash surrender value will win as lower cost bc the insurance company didnt pay out much to any of the high percentage of people who surrender/lapse the policy. If not using just the guaranteed values then it isnt a certainty. I still wouldnt pick WL for a death benefit only situation (assuming that one wants a permanent insurance product) but i wont claim it cant under any situation beat a UL.
Rex: You just said, “If one wants just the death benefit and we are basing conclusions off guaranteed values only then the UL with low cash surrender value will win as lower cost bc the insurance company didnt pay out much to any of the high percentage of people who surrender/lapse the policy.” The first part is correct, which was my point all along (that UL will win at being lower cost if all you need is death benefit), but the second part is completely inaccurate. It’s not lower cost because of less people surrendering the policy. It’s lower cost because of the way the policy is structured. Insurance companies want you to surrender/lapse permanent policies. That is a good thing for them. Whenever someone buys life insurance, the company has to set aside a certain amount of money in reserves that they aren’t allowed to touch. When you surrender a policy, the company pays the surrender value, collected your premium for all those years, and now does not have to pay out a death benefit and has access to those reserves. If the lapse rate is lower than they anticipate, then insurance is likely to cost more since they are now on the hook to pay out more claims than anticipated. It’s the opposite of what you said and that is not the reason why UL is lower cost.
No you are not right but thats fine as long as you arent promoting ULs as something better than WL. Its just different in the typical structure one sees on a common policy. A whole life policy can be created to also have very low cash surrender values. Unfortunately i know about this. It can also be created to have springing values later on in the life of the policy. Bottom line is that a UL and a WL can be made to look very similar and when they do there isnt a winner. The more guarantees you place within the policy such as the investment side or the cost of insurance then the more the insurance company will charge you for those guarantees. Have a nice day.
[Ad hominem attacked removed.] Springing cash value policies are designed to build a lot of cash value. Just not in the early years. The purpose is to buy these policies in a pension plan and then purchase the policy from your own pension for a low cost (while the cash value is low). Then the value springs up. BTW, you can’t do this anymore without being audited. Just google this stuff and you’ll finally figure it out. WL policies have guaranteed cash values and even just the guaranteed values are pretty significant. In order to get lower cash values, you have to manipulate the policy and start paying premiums from the cash value and have dividends go towards premiums instead of paid up additions. Guess what, you can pay UL premiums from the cash value too. But at the end of the day, if you are comparing straight premium to death benefit, ULs come out ahead. You have nice day too!
im very familiar with that you cant purchase it out of a pension plan for cheap even but have to use the greater of the perc or ntr value to create a true fair market value. Unfortunately very familiar. still doesnt change the conclusions.
Mostly, yes, they are trying to sell expensive WL policies. But I agree that if you need a permanent death benefit, guaranteed no-lapse universal life insurance is a better option as discussed in my myths series.
Thanks, Gary for providing such a valuable information about the survivorship life insurance plan. A lot of people including me was not knowing about this insurance plan. Keep sharing more useful information about life insurance with us.