Our Experts Explain Survivorship Riders Found in Second-to-Die Life Insurance

Survivorship riders are a form of guaranteed purchase option. A survivorship rider naming someone other than the insured as the “designated life” is attached to a single life policy. If the designated life dies before the insured, the policyowner has the right to increase coverage on the insured without evidence of insurability. The rider provides “wait-and-see” flexibility because the policyowner may exercise the right to the full amount of additional insurance or any portion thereof.

Survivorship riders with single life policies on a husband and wife can be designed to mimic a SL plan. Each spouse names the other spouse as the designated life. This arrangement is essentially equivalent to a three-policy survivorship life plan where there is a single life policy on each spouse and a SL policy on both spouses. In contrast with many SL plans, the survivorship rider plan will require additional premiums to pay for the added coverage after the first death. However, premium payments will cease (if they have not already ceased under a vanishing premium plan) on the policy of the deceased. Also, depending on how ownership and beneficiary designations are selected, the death proceeds from the single life policy on the first-to-die may be available to pay premiums on the survivor’s policy or as a lump-sum payment into the survivor’s policy. Similar to SL, an irrevocable life insurance trust may hold the policies. Because the additional coverage is optional, the trustee has the flexibility to select only that amount of additional coverage that is deemed necessary after the first death.

Survivorship riders can also provide great versatility in business insurance planning, such as in cross-purchase buy-sell arrangements.

Example. Assume each of three shareholders (A, B, C) purchases policies on the other two shareholders equal to one-sixth of the company’s value. They also attach survivorship riders to the policies allowing them to purchase additional insurance on the survivors equal to one-third of the business value. In specific dollar terms, if the company is worth $6 million, A would purchase policies on B and C with base amounts of $1 million. The policy on B would name C as the designated life and vice versa. The survivorship riders would permit A to buy an additional $2 million of coverage on B if C died first or on C if B died first. B and C would make analogous arrangements.

Now assume C dies. A and B would receive $1 million each in insurance proceeds, which together is enough to buy out C’s $2 million interest in the company. A and B now each own 50 percent of the $6 million company, but the face value on the base policies each owns on the other is only $1 million. However, the survivorship rider permits them to purchase an additional $2 million of coverage on each other for a total of $3 million. They each will then have sufficient insurance in the event of the other’s death to buy out the other’s $3 million interest in the company.

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

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