Executives, business owners and other high net worth individuals are actively looking for ways to preserve their estates, not only for their family members, but also for charitable organizations.
Based on his personal experience, Samuel R. Lee, an attorney at John Hancock Life Insurance Company and a licensed insurance counselor based in Dallas, says there are currently a large number of applications for survivorship life insurance in the business market alone, and brokers should take advantage of this opportunity.
Survivorship life insurance, or "second to die" insurance, is a policy that insures the lives of two people. The death benefit is not rewarded to the beneficiary until after the second individual insured passes.
Generally, on second to die policies, the costs are actually cheaper because the carrier is not paying a claim or a death benefit until two people have died, says Brian Pearson, senior vice president of Austin, Texas-based Madison National Life. There's actually less risk for the insurance carrier, he adds.
"It's an incredibly powerful tool for the right client and right situation," says Tony Brant, a MassMutual financial professional with Skylight Financial Group in Cleveland. "It is not talked about as much as it could be. It does take some planning - legal and tax work as well as highly customized tailoring for the situation."
Second to die and regular life insurance plans
Two individuals can sign up for a second to die life insurance policy and also have two separate life insurance policies "as long as the employer/plan sponsor offers the two plans," says Michael Lackey, vice president of New York Life. "We offer all of our whole life options on a traditionally underwritten basis through our payroll deduction program. Additionally, we offer individual employee whole life through our simplified or guaranteed issue underwriting plans."
Many different forms
Survivorship policies can be written in the form of a whole life, universal life or variable universal life contract, an indexed universal life policy or term insurance, says Lee. Term life insurance is not popular among enrollees, since it's usually not as cost effective to buy two term policies on two different people, he observes.
In fact, a survivorship life insurance policy typically is half the cost of two individual policies.
Ideal for the older generation
Survivorship policies are a good choice for individuals in their late 60s and older, but are less attractive for younger people, since after a few decades the policy will be replaced with a new product, Brant explains.
"Second to die life insurance really becomes a tool to help individual clients, business owners, families achieve their long-term goals that have some dimension of a desire to leave a legacy, that being the death benefit or the death benefit on the insurance policy itself," Brant says. "These legacies can certainly be set up to benefit next generations, family members or even charitable [organizations]."
Not just for married couples
Although the individuals buying survivorship life insurance typically are married couples, it is not uncommon to see others, including business associates, purchasing the policies.
"With second to die, you can have a lot of different combinations as long as there is an insurable interest, for example, two business owners, grandparents and grandchild, or parent and child," says Lee.
"Specifically, it can be broader than a married couple," Brant agrees, "but that will vary by insurance company, depending on what they are willing to consider."
While there are many reasons why individuals might want to invest in second to die life insurance, another particularly important reason is to provide for a disabled or special needs child or adult that is dependent on the insurers.
"A common question among plan sponsors is what, if any, obligation exists to the surviving spouse of a deceased employee," says Lackey. "Ongoing communication tends to be the biggest concern. Many employees also question how their spouse is impacted if they die: How will the ongoing policy premiums be paid and who will service the insurance contract?"
Lee explains that brokers may encounter a situation where one of the two individuals seeking a survivorship life insurance policy is uninsurable. The two will still be able to buy a survivorship life insurance policy with one being completely uninsurable, and it will still cost less money.
Pearson agrees but says the purchasing of this policy with an uninsured individual may vary depending on the carrier because the underwriting requirements can be a lot more liberal with certain carriers.
"The product is very easy to sell if it fits the situation," Lee says. "Second to die is much cheaper; they are able to make a gift to a trust, third party owner without having to pay gift tax whereas if they were using individual policies it could possibly put them in a gift tax taxable situation."
Federal estate, gift taxes
Brant urges brokers to make sure the policies are structured properly so policyholders can avoid federal estate tax.
"Back when federal estate tax kicked in at $1 million or greater in assets, this was an often-used tool to help provide liquidity to the estate in order to pay federal estate taxes. Recently, the federal estate tax was modified to only come into effect on a estates larger than $5 million [each] for a married couple; this is sort of a rarified audience in its traditional use," he says.
Typically, he continues, "if the intent is true and pure [and an individual] wants to leave a legacy, the insurance policy is placed in an irrevocable life insurance trust so it is out of the estate of the insured; it can still be funded by gifts from the parents, as an example, but the entire death benefit proceeds will pass tax free to the beneficiaries. When we're talking large dollar amounts (more than $5 million dollars), this extra estate planning or irrevocable trust planning is likely to be required."
There are some disadvantages with survivorship life insurance, especially in the event of a divorce between the recipients, says Pearson. He also adds that the proceeds from a second to die life insurance policy go to the beneficiary tax free, but advisers should alert buyers that the policy can still be considered part of an estate and put them over the threshold.
Advisers also need to be sure that they communicate exactly what a second to die life insurance policy entails to future and current policyholders.
"An applicant has to truly understand what their buying," says Pearson. "If their spouse dies first, they are not getting paid; they're not getting any money to cover medical bills, funeral expenses or daily living expenses."
Summarizes Lackey: "Agents can grow their employer-sponsored insurance business by offering second to die insurance. Senior executives and business owners who would not otherwise purchase insurance for the protection or income needs of their surviving spouse, as they have alternative assets for spousal maintenance, can address their estate protection need instead."
Pearson agrees, but adds a caveat. "You've got to play to your strengths and exploit the niche markets that are out there," he maintains. "To just take second to die life insurance, add it to your product portfolio and mention it to any perspective customer out there really doesn't make sense. You need to focus on being a second to die life type of agent and narrow your market down."
Pros and cons of survivorship policies
* Generally less expensive than two independent policies
* Less risk for the insurance carrier
* Policy holders need not be related
* Not limited to whole life policies
* Excellent way to provide for a legacy
* Policy has to be customized for the situation
* Only for large estates
* Policy might not be dividable in case of divorce
* Death benefit may be taxable
* There may be an unfavorable change in estate-tax laws
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