Life Insurance: Understanding a Key Part of Your Estate Plan, Part 2—Universal, Variable and Survivorship Policies

By Ellen S. Jackson | Related Practice: Estate Planning & Administration

This is the second installment of a three-part series focused on life insurance. Part 1 provides an overview for term and whole life insurance. This article explains some of the lesser-known policy options.

Universal Whole Life

Universal life insurance was designed to provide policyholders with more flexibility than traditional whole life insurance by offering the ability to shift investments between the insurance and savings components of the policy.  Unlike traditional whole life insurance, universal life insurance allows the policyholder to use the interest from accumulated savings to help pay premiums.  If the savings portion of a policy is earning relatively low returns, it can be used instead of external funds to pay the premiums.  Unlike traditional whole life insurance, universal life insurance allows the cash value of investments to grow at a variable rate instead of a fixed rate. 

Variable Whole Life

Variable whole life insurance is a another type of flexible permanent life insurance that combines insurance with a savings component that can be invested.  Like whole life, so long as the premiums are paid, the death benefits will be available to provide for the beneficiaries upon the death of the insured.  The major advantage to a variable policy is that the policyholder may participate in various investments without being taxed on those investment earnings (assuming the policy is not surrendered or subject to certain rules related to policies with large single-premiums.)  However, as with any investment, there is the market risk of poor performance, and when the investment options are performing below expectations or assumptions, the policyholder may have to add funds to keep the premiums paid and the policy in force. Importantly, poor investment performance can also lead to a decline in the level of death benefits, though generally not below a stated level unique to each policy. 

Survivorship Life Insurance

Sometimes called second-to-die insurance, a survivorship life insurance policy is designed to insure two lives under one policy and one premium.  Sometimes a component of a married couples’ estate plan, a survivorship policy generally offers lower overall cost for the same total death benefits than two separate policies insuring the same couple.  Death benefits are only paid after the death of the second person to die.  When estate taxes are a consideration, many couples will plan to defer payment of the taxes until the death of the second spouse.  Survivorship insurance can therefore provide liquidity to pay estate taxes at the precise time when the funds are needed.  When a survivorship policy is considered primarily in anticipation of paying federal or state estate tax, the potential insureds, along with their legal and insurance advisors, must carefully consider who should own the policy.  Often, a trust, sometimes termed an irrevocable life insurance trust (or “ILIT”) is the most appropriate vehicle to ensure that the death benefits are available for their intended purpose and that estate and income tax consequences are minimized or avoided. 

The final segment in this series will discuss the use of trusts to own life insurance and the considerations relevant when creating and funding a such a trust.  

If you are interested in learning more about life insurance, please contact a member of the Stokes Lawrence Estate Planning Group.