Survivorship Life Insurance

Cornelius and Rosalind Whitcombe, both 74 and both U.S. citizens, hold an estate well above the federal exclusion amount. Their documents leave everything to the survivor at the first death and to their children at the second. Their planner recommends a SURVIVORSHIP (second-to-die) life insurance policy. The primary reason is:

1. A.It pays at the FIRST death, providing replacement income to the surviving spouse during a vulnerable period.Incorrect. A survivorship policy pays only at the SECOND death. If income replacement at the first death were the goal, individual policies would be required.
2. B.Premiums on a survivorship policy are deductible for federal income tax purposes, unlike premiums on individual policies.Incorrect. Personal life insurance premiums are never deductible, whatever the policy design.
3. C.Death proceeds from a survivorship policy are excluded from both spouses' gross estates regardless of who owns the contract.Incorrect. Proceeds are income tax free to the beneficiary but are includible in the insured's gross estate if the insured held incidents of ownership. That is why such policies are usually owned by an irrevocable trust.
4. D.The unlimited marital deduction defers the federal estate tax until the second death, and a policy paying at the second death costs less than two individual policies while delivering liquidity exactly when the tax comes due.Correct. The timing of the proceeds matches the timing of the tax, and insuring two lives for one payout lowers the premium relative to two separate policies.

Why: Because the unlimited marital deduction shelters transfers between U.S. citizen spouses, no federal estate tax is generally due at the first death; the tax bill arrives when the survivor dies and assets pass to the children. A survivorship policy insures two lives and pays only at the SECOND death, matching the payment of proceeds to the moment liquidity is needed. Insuring two lives for a single payout also makes the premium lower than two comparable individual policies, and it can allow coverage where one spouse alone would be difficult to underwrite.

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.