What is a Secondary Guarantee?

A secondary guarantee is a type of contractual commitment that is often found with life insurance coverage. A guarantee of this kind provides the insured party with the assurance that the provider will pay a full death benefit, even if the cash value of the policy is zero at the time of death. With most policies that include a secondary guarantee in the terms and provisions, this means that the policy does not build an excessive amount of cash value over time, even if the insured party lives to an unusually old age and continues to make premium payments consistently.

One of the main benefits of this type of insurance guarantee is that the age of the insured party, or how long the policy has been in effect, are of relatively little importance. For example, if an individual takes out the coverage at the age of thirty, then dies at the age of thirty-five, the policy will pay out the guaranteed benefit to the insured party’s beneficiary. It does not matter how much the party had paid into the policy during those five years, providing he or she had made premium payments in accordance with the terms of the coverage, and the death was due to an event or situation that is covered in those terms.

Even in the event that the insured party lives for many years past the average age, the secondary guarantee remains in effect. As long as payments are made in a timely manner, the coverage cannot be suspended or canceled. This can be especially helpful if the insured party intends the death benefit to be used to settle end of life expenses, or to provide some type of financial assistance for a loved one. Since the amount of the benefit is guaranteed, it is much easier to allow for that amount in the overall estate planning, a fact that provides a measure of comfort for the holder of the policy.

The use of a secondary guarantee is often included in life coverage known as a universal life policy. This type of coverage combines aspects of whole life and term life insurance, providing the insured party with the best of both forms of insurance. Clients enjoy premiums that are generally lower than the premiums associated with whole life coverage, but still can depend on the disbursal of a specific death benefit to their beneficiaries. As with most forms of life insurance, providers of universal life usually require some sort of waiting period before the guarantee is honored, with the period being anywhere from a few months to a couple of years. In addition, certain causes of death, such as suicide, may render the terms and conditions of the secondary guarantee policy invalid, resulting in the benefit not being disbursed to the beneficiary or any other party.