Policy Split Option Rider

Halvard and Sunniva Bruun own a 4,000,000-dollar survivorship policy bought to provide estate liquidity. Their attorney warns that two future events would defeat the design: the couple divorcing, or a change in the estate tax law that eliminates the liquidity need for a married couple. He recommends adding a rider that addresses exactly those contingencies. Which rider is it, and what does it do?

1. A.A guaranteed insurability rider, which lets them buy additional coverage at scheduled option dates.Wrong. That rider adds NEW coverage at set dates. It does nothing about the joint structure of an existing survivorship contract.
2. B.A policy split option rider, which divides the survivorship contract into two individual policies without new evidence of insurability on defined events such as divorce or a change in the tax law.Correct. The rider restructures the existing contract on defined triggers, and the waiver of insurability is what makes it valuable.
3. C.A first-to-die conversion rider, which accelerates the entire death benefit at the first death.Wrong. Paying at the first death would convert the contract into something the couple deliberately did not buy, and it is not what the attorney described.
4. D.A cost of living rider, which adjusts the face amount as economic conditions change.Wrong. A cost of living rider indexes the amount of coverage. It has no bearing on divorce or on the structure of a joint contract.

Why: A survivorship, or second-to-die, policy pays only at the death of the SECOND insured, which is what makes it efficient for funding an estate tax liability that itself arises at the second death. That efficiency becomes a liability if the premise fails. A POLICY SPLIT OPTION rider addresses that risk by permitting the single survivorship contract to be divided into two individual policies, one on each insured, each typically for half the face amount, WITHOUT new evidence of insurability. Riders of this kind are triggered by defined events, most commonly a divorce or a change in the tax law that removes the reason for the joint design. The value lies in the waiver of insurability: by the time such an event occurs, one or both insureds may be uninsurable, and without the rider they would be stuck with a contract that no longer serves any purpose.

Bramwell and Ottoline own a survivorship policy bought to fund estate tax at the SECOND death, on the assumption that the unlimited marital deduction defers tax at the first death. They divorce, and each now needs coverage payable at his or her own death. Which rider lets them respond without new underwriting?

1. A.A POLICY SPLIT OPTION rider, which on a defined triggering event such as divorce permits the survivorship contract to be exchanged for two individual policies, generally without evidence of insurability.Correct. The rider anticipates exactly this problem: the reason for second-to-die coverage disappears, and the insureds need individual policies at a point when they may no longer be insurable.
2. B.An estate preservation rider, which increases the death benefit if both insureds die within a short period after issue.That rider addresses a different problem, the estate tax exposure if both insureds die before the estate plan matures. It adds benefit; it does not divide the contract.
3. C.A guaranteed insurability rider, which lets each insured buy separate coverage at scheduled option dates.A guaranteed insurability rider adds new coverage at predetermined dates. It cannot be triggered by a divorce and does nothing about the survivorship contract they already own.
4. D.A conversion rider, which changes a term policy into a permanent one.Conversion changes the TYPE of coverage on the same insured. It does not separate a two-life contract into two single-life contracts.

Why: A POLICY SPLIT OPTION rider permits a survivorship contract to be exchanged for two individual policies, one on each insured, when a defined triggering event occurs. Typical triggers are divorce or a change in the tax law that removes the reason for buying second-to-die coverage, such as repeal of the unlimited marital deduction. The split is generally available without evidence of insurability, which is exactly what makes the rider valuable, since the whole risk of a survivorship policy is that the plan changes while the insureds are no longer insurable.