Divorce Considerations with the Second-to-Die “Survivorship Life” Insurance Policy

Almost all currently available survivorship contracts allow policy splits between divorced spouses. However, some policies force the husband and wife to prove evidence of insurability at the time of the split, which is a major disadvantage, especially at older ages, when a person is more likely to be rated and it is more difficult to find coverage for substandard risks. In addition, some split-option riders or exchange riders add significant costs to the contract each year the policy is in force or allow the company to charge a split or exchange fee that can further erode cash values. Also, survivorship plans that use term riders often exclude them from the split option.

Usually the insurer offers two new single life policies with premiums based on the insureds’ ages when the survivorship life policy was issued. The cash value generally is evenly split into the new policies. A problem may arise if the premium on the new policy and the divisible share of the cash value from the survivorship policy are insufficient to cover the necessary reserves on the new policies. If a policy split occurs many years after issue of the survivorship policy and dividends have been sizable, the probability that this problem will arise is negligible. However, the likelihood of a problem increases if the split occurs soon after issue or if dividends have been low, especially in the male’s policy. The insured may have to make a lump-sum payment to cover the shortfall or have the benefit reduced. Some companies offer the option of paying higher premiums to fund the shortfall over time. Other companies avoid this problem by issuing new policies at attained ages. In these cases the premiums are based on higher mortality charges and the policyowners must pay full commissions and other new policy costs once again. If the split occurs at later ages, many insureds may find the premium cost prohibitive.

Other companies issue survivorship policies that allow splits without evidence of insurability and without new policy charges. However premium costs may be somewhat higher on the survivorship policy to compensate the company for these potential costs.

Reproduced with permission. Copyright The National Underwriter Co. Division of ALM

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