the US have been dashed by the economic upheaval the country finds
itself in. This has sparked a revival in popularity of
second-to-die life insurance among individuals who have significant
assets they wish to protect from the ravages of estate duty.
Charles Davis reports.
Second-to-die life insurance products – also known as
survivorship insurance – were created in the US with one goal in
mind: to ensure heirs of an estate would not face estate taxes over
and above the estate-tax exemption. With the estate tax unlikely to
disappear beyond a one-year exception in 2010, second-to-die
policies are mounting a comeback.
Second-to-die insurance was created in 1981 when President
Reagan introduced the unlimited marital deduction, allowing married
couples to pass all assets to a surviving spouse at the death of
one spouse. But when the second spouse dies, the estate tax hits
the couple’s combined assets, currently to the tune of 45
Back in those days, there was more need for such a tax shelter
since the lifetime exclusion for estate assets was only about
$600,000. This year the federal estate tax exemption rose to $7
million per couple or $3.5 million per spouse from $4 million per
couple and $2 million per spouse in 2008.
That sounds like a lot of money, but in a family business
scenario, estates can easily exceed the exemption thresholds, with
devastating consequences for families. Second-to-die policies
emerged to protect married clients who have significant assets. And
they can also be used to supplement retirement income tax-free, as
long as the policy stays in place until death.
Benefiting current and future generations
Second-to-die premiums have grown in popularity because they
provide asset protection similar to universal life policies, but
typically feature lower premiums. The difference in pricing stems
from the fact they cover two people, and reflects a calculated risk
that a healthy individual will live a long time and pay lots of
money to the insurer in premiums. The risk of an early payout is
essentially halved, because the chances of both claimants dying
early are less than the chances of one dying early.
Second-to-die policies are usually for people in their 50s to
80s who are looking at a tax increase, but want to get as much of
their assets to their heirs as possible. The sooner a client starts
paying, the cheaper the premiums. Survivorship insurance is the
only product available that both offers protection to a
policyholder’s family in the event of an early death through the
life insurance benefit and a tax-advantaged account the
policyholder can access tax-free in retirement.
Second-to-die policies are often used in conjunction with
irrevocable trusts, to ensure that the death benefit can be
transferred to future generations. The irrevocable trust owns the
policy outside of the estate and pays its premiums. A couple can
gift up to $12,000 per year each to pay the premiums. Other
planners use dynasty trusts, a variation of the irrevocable trust
that holds assets for a wealthy couple’s children and
grandchildren, which can last for a lifetime plus 21 years.
Future appreciation of these gifted assets is excluded from the
clients’ taxable estate at death. Additional gift tax leverage may
be available through discounting of minority interests in privately
Consumers can pay for second-to-die insurance with higher fixed
premiums or premiums that start out low and rise as the owner ages.
A $10 million policy might cost a 30-year-old in good health 0.5
percent in annual premiums, but by age 70, the cost would rise to 3
percent or 4 percent of face value, depending on the health of the
insured. Policyholders can choose to overpay when they are younger
and premiums are lower, with the excess going into a cash balance
account, which grows over time and can cover payment of premiums in
Funds deposited in an irrevocable trust can’t be withdrawn, but
the policy owner can use the policy to provide limited funds to the
other spouse even while the owner is alive via a spousal access
Once there is enough money built up in the cash balance,
policyholders can withdraw money tax-free as a preferential loan.
Advisors have to ensure that clients don’t take out too much – or
they may spend money that would have covered the premium.
For financial advisers wary of selling insurance policies,
second-to-die removes many of the traditional hurdles and sensitive
questions that pop up in life policy issuance. Provided the couple
is reasonably healthy, the risk of denial is negligent, because
only one of the two spouses need be insurable.
Survivorship life also focuses on the future of the family’s
wealth, rather than the inevitable demise of the breadwinner – a
much more upbeat sales pitch and one that can be vividly
demonstrated through tax analysis.
Helped by the political landscape
Also fueling the growth of second-to-die policies is the
political reality that the estate tax moratorium long sought by
many US conservatives has little or no chance of passage anytime
soon, given hefty Democratic majorities in both houses of Congress,
not to mention the White House.
The Bush administration’s plan was to completely eliminate the
estate tax in 2010, but neither a total estate-tax break in 2010
nor a return to a substantially lower $1 million threshold in 2011
is likely to happen now.
Even if the politics were different, the US is so famously
strapped for cash and simply can’t afford to forfeit billions in
lost estate-tax dollars.
Observers said that President Obama’s administration is likely
to permanently lock in the $3.5 million exemption for a long time
to come. As inflation on this exemption can have a surprisingly
sudden impact, more people could need second-to-die insurance to
protect them from estate taxes in the years to come.
During the first three quarters of 2007, sales of survivorship
life insurance rose 10 percent versus the previous year, according
to research and consulting firm LIMRA International. (The firm
declined to disclose actual premium sales numbers to LII.)
By comparison, sales dropped 16 percent in 2005 and 3 percent in
The growth in sales is due to increases in both the number and
size of survivorship life policies, Elaine Tumicki, vice-president
of product research at LIMRA told LII. Average coverage
sold per policy was $2.9 million last year, up 13 percent from $2.5
million in 2006. Meanwhile, the average policy cost $13.54 per
$1,000 of coverage in 2007.