Definition
Variable Survivorship Life Insurance is a type of permanent life insurance policy that covers two individuals and pays a death benefit after the second person’s death. The policy mixes elements of life insurance and investment, as it allows policyholders to invest in various sub-accounts similar to a mutual fund. The value of the death benefit and cash value is dependent on the performance of these investments.
Phonetic
Variable Survivorship Life Insurance: Vair-ee-uh-buhl Suh-vahy-ver-ship Lahyf In-shur-uhns
Key Takeaways
- Variable Survivorship Life Insurance is a type of permanent life insurance that insures two people and pays out benefits after the second person dies. This insurance type is often used by couples who want to ensure that their heirs will get a significant death benefit.
- One of the defining features of Variable Survivorship Life Insurance is the investment component. The policy includes a cash value account that can be invested in different options offered by the insurer, with the potential for significant growth. However, these investments also come with risk, as their value can decrease.
- The cost and premiums of Variable Survivorship Life Insurance can fluctuate depending on the performance of the investment component. Although this type of policy can offer valuable coverage and investment potential, It is essential for policyholders to fully understand the risks and the costs before buying.
Importance
Variable Survivorship Life Insurance is an important business/finance term as it refers to a type of life insurance that covers two individuals and pays a death benefit after the second individual dies. The variable aspect of this policy denotes that the policyholder can allocate the cash value portion among a variety of separate accounts or investments, which can fluctuate based on the performance of these investments. This ability for the policyholder to manage the cash value of their insurance plan and potentially grow it based on market performance affords them a level of control and potential for growth not seen in other types of life insurance policies. Therefore, its significance lies in its potential for investment growth alongside offering post-death financial security.
Explanation
Variable Survivorship Life Insurance, also known as second-to-die or survivorship life insurance, serves the crucial purpose of ensuring the financial security of dependents or heirs in the event of the demise of two insured individuals, typically a couple. The policy is framed in such a way that the death benefits are paid out after the passing of both the policyholders. This type of insurance can be incredibly beneficial for estate planning purposes, as it can assist in covering estate taxes, maintaining a family business, or leaving a legacy to heirs or charitable organizations.
This insurance is especially useful for couples with a substantial net worth who wish to protect their wealth for their children or beneficiaries. It ensures that the estate gets passed down to the beneficiaries without being largely consumed by estate taxes. This policy can also serve as a means of ensuring the continuation of a family-run business; in such cases, the death benefits from the policy can facilitate a smooth transition and keep the business operations running even in the absence of the original owners.
Examples
Variable Survivorship Life Insurance, also known as Variable Universal Life Insurance or Survivorship Life Insurance, is a type of insurance policy that covers two people and pays a death benefit only after both individuals have passed away. Here are three real world examples of Variable Survivorship Life Insurance:
1. Estate Planning: John and Jane Smith are wealthy individuals who have a substantial amount of assets. They are worried about the significant estate taxes their heirs will have to pay upon their deaths. So, they purchase a variable survivorship life insurance policy. The policy will pay out a death benefit after both John and Jane have passed, providing their heirs with the funds needed to pay the estate taxes.
2. Business Succession Planning: Paul and Patricia are business partners who own a profitable business together. They decide to purchase a variable survivorship life insurance policy, so in case of their simultaneous demise, the death benefit will be used to buy out their shares in the business, ensuring a smooth transition of the company to the next generation or chosen successor.
3. High Net-Worth Couples: Let’s say, Sophia and Robert are married, and both have successful careers, which makes their combined net worth quite significant. They opt for variable survivorship life insurance. After the death of the surviving spouse, the benefit from the policy can be used to provide financial support to their children, donate to a charity of their choice, or take care of any debts that they may have left behind. The policy provides not only a death benefit but also a potential cash value accumulation through investments, giving them a chance to increase their policy’s value over time.
Frequently Asked Questions(FAQ)
What is Variable Survivorship Life Insurance?
Variable Survivorship Life Insurance is a type of permanent life insurance policy where benefits are given to beneficiaries upon the death of the last surviving policyholder. The policy allows for investment in various accounts that can potentially increase the cash value and death benefit.
What are the main components of a Variable Survivorship Life Insurance?
The main components are the death benefit, which is paid to the beneficiaries upon the death of the last insured individual, and the cash value account, which is an investment component that allows the policyholders to invest in different accounts.
Who is best suited for a Variable Survivorship Life Insurance policy?
This policy is best suited for individuals who have a high net worth, are in good health, and are looking for a way to potentially grow their death benefit while providing for heirs or charities.
Why would one consider purchasing Variable Survivorship Life Insurance over other types of life insurance?
The key advantage is the potential for increasing the death benefit through investments. It also provides an effective tool for estate planning and tax-efficient wealth transfer.
How does the cash value component work in Variable Survivorship Life Insurance?
The cash value component allows policyholders to invest in a variety of investment options including stocks, bonds, and money market funds. Any gains from these investments become part of the cash value of the policy.
Can you lose money with Variable Survivorship Life Insurance?
Yes, because the policy allows you to invest in different financial markets, which means your cash value and potentially your death benefit can go down if your investments do poorly.
Is the premium for Variable Survivorship Life Insurance fixed?
While some policies may offer fixed premiums, most have flexible premiums. The policyholder can determine how much to pay within certain limits, which can affect the cash value accumulation and the amount of the death benefit.
What happens if one of the policyholders dies in a Variable Survivorship Life Insurance policy?
The policy does not pay out until the death of the last surviving policyholder. The death benefit is then given to the beneficiaries named in the policy.
Can I withdraw from the cash value of my Variable Survivorship Life Insurance?
Yes, the owners can make withdrawals or loans from the cash value of the policy. However, this may decrease the death benefit and can have tax implications.
Are there any tax benefits with Variable Survivorship Life Insurance?
Yes, the policy’s death benefits are generally free from income tax. Also, you can potentially grow the cash value on a tax-deferred basis. However, taxes may apply for withdrawals or loans from the cash value.
Related Finance Terms
- Premiums: The amount required periodically by the insurer to provide coverage under the contract for a defined period.
- Cash Value: A feature within certain life insurance policies that provides an accumulating tax-deferred savings account within the policy.
- Death Benefit: The sum of money paid to beneficiaries upon the death of the policyholder.
- Investment Risk: The risk associated with the investment component of the policy that can significantly impact the policy’s cash value and death benefit.
- Mortality Charge: The cost insurance companies charge against the policy primarily based on the life expectancy of the policyholder.
