Survivorship life policies may require more careful scrutiny and analysis than other life insurance products both because of the extended expected period of coverage and because of the many options and policy features. A key consideration when selecting any insurance policy, but especially survivorship life because of the relatively long term of coverage, is the financial strength and stability of the insurance carrier. The following discussion outlines the key issues and questions concerning the selection of a SL policy.
What is the Composition of the Base Policy?
The base policy is typically a permanent type of insurance—traditional whole life, current assumption whole life, or universal life. Whole life generally is preferable in the simpler situation where the plan envisions a vanishing premium that will endow the policy. Universal life usually is more desirable for older insureds who are looking for a low premium and more flexibility. For example, using current (nonguaranteed) assumptions to determine the premium can produce a premium that is as little as half that for a traditional whole life policy. However, the low-premium universal life plan will usually require premium payments each year until the second death. Premium payments under the whole life plan may vanish well before the expected time until the second death. In general, one can expect the present value of the premium payments to be about the same under each policy. Therefore, the critical element is the desire for flexibility versus relative certainty. Although the performance of each type of policy is uncertain, because the insurer guarantees neither projected dividends nor projected interest credits, the whole life plan typically involves more advanced and “forced” funding. Therefore, the policyowner has more assurance the plan will be completed as originally contemplated, even if the premium payment period must be extended beyond that originally planned because actual dividends are lower than were projected.
If the policyowner desires a growing benefit to cover a potentially increasing estate tax liability, a whole life policy without a vanishing premium (and without term insurance blends) where the policyowner uses dividends to buy paid-up additions or a universal life policy under option B (net level death benefit plus cash value) is often the preferred plan of insurance. Assuming premium payments and other elements are similar, in most cases the UL plan will provide a faster growing benefit. However, at longer durations the whole life plan may surpass the benefits provided under the UL plan.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM