With Estate Tax Change In Mind, Clarica Debuts `Short Term Survivor UL

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When proposals to reduce or eliminate the estate tax started getting serious attention last year, veteran estate planner Joe Caramadre noticed a startling trend in client decision-making: Survivorship life prospects began putting their buy decisions on hold.

They didnt dislike the price, companies or policies, says the president of Estate Planning Resources in Providence, R.I.

But they were uncertain about the outcome of estate tax reform, so they wanted to wait and see what would happen, says Caramadre, who is not only a JD but also a CPA, CLU, ChFC and CFP.

“I argued that this was unsound reasoning,” he recalls, but the clients still held off.

That propelled him to do something about it. As it turns out, he collaborated with Clarica Life Insurance Company of Fargo, N.D., to develop a survivorship policy that fits the current climate.

That product–Wait & See Survivorship Universal Life–has now debuted in most states. Its a single premium UL, written on two lives, that pays proceeds upon the second death. It allows owners to get their initial premium back at the end of a 10- or 15-year “wait-and-see” period. If they dont exercise the option, they can then continue the UL at current rates and charges.

In its first three months, Wait & See has already had sales, and several cases are now pending in underwriting, says Daniel E. Peterson, vice president-sales and marketing for Clarica.

Average case size is over $2 million, he adds. (Minimum face is $250,000.)

To what does Peterson attribute this interest?

This is a “short-term survivorship life policy” that addresses the uncertainty people are feeling today, he maintains. It lets estate planning clients protect their assets now, but also lets them leave the contract after the first 10 or 15 years–for any reason–and get their initial premium back.

That has a lot of appeal today, says Caramadre, the estate planner, because some clients are “reluctant to sink big premium dollars into a policy they think they may not need in the future” due to changes in estate tax laws.

Traditional survivorship ULs cant meet this need efficiently, contends Peterson, because they are designed as long-term permanent contracts.

Yes, traditional designs do allow liquidity through loans and withdrawals, he allows. But he says theyre not built with the short term (i.e., the ability to get your money back after 10 or 15 years) in mind.

Some other advantages the two executives see for the Wait & See product are:

–”The policys single premium design allows the company to offer clients a high death benefit compared to premium outlay,” says Peterson. (See chart.)

–The one lump-sum premium appeals to people who dont like paying the large annual premiums often required by traditional survivorship ULs, he adds.

–It has no surrender charge, so clients can get their money back with no penalty. By contrast, says Caramadre, the planner, traditional survivorship ULs typically levy large surrender charges in the first 10 to 15 years. Some clients object to that, he says.

Heres how the provision works: The “money-back” feature is provided via a “guarantee age or endowment endorsement rider.” This says the ULs cash value is guaranteed to equal the premium paid at the end of the 10- or 15-year “wait-and-see” period.

Owners choose whichever guarantee period they want. The guarantee is set according to the current cost of insurance and the current credited interest rate (5.75%, as of May 31, 2001).

At the end of the period, the owners can elect to get back their initial premium for any reason whatsoever, says Peterson. “This reason could be changes in estate tax law, but it also could be divorce, bankruptcy, rearrangement of the estate distribution plan, or anything else.”

The money is returned free of surrender charge and, in most cases, tax-free, too. (Its tax-free because this is a return of principal, not gain, says Peterson. The only exception would be over-funded contracts, which pay back gain as well as principal.)

Sample case: On May 30, 2001, two 65-year olds, rated preferred, could have bought a 15-year $1 million contract for $54,000, assuming the current credited rate is 5.75% (fixed for all 15 years). They can get this money back at the end of the 15 years.

In effect, the earnings on the money pay the COI rates for the 15 years, says Peterson. Because of that and because of the money-back feature, clients view this policy as a way to transfer assets to pay for life insurance for 10 or 15 years, he asserts.

“Most who buy are banking on the assumption that they wont need this insurance after the end of the guarantee period,” he adds.

If owners choose not to exercise their guarantee, they can: 1) continue the policy at original face amount, with current interest rates and with annual premiums based on current cost of insurance; 2) continue at a reduced face amount and reduced annual premiums, still using current COIs; 3) continue, with no additional premiums, until the UL lapses; or 4) 1035 exchange into another policy.

Will a presidential signature on the tax bill that passed Congress in late May take the sizzle out of Wait & See?

Not at all, says Peterson. “In fact, that legislation couldnt have done us a bigger favor.”

The bill does phase in a rising estate tax exemption and it does provide for repeal of the estate tax altogether on Jan. 1, 2010, he allows. “But there will still be uncertainty about what will happen later on,” the executive contends. (Note: A sunset provision provides for what is essentially a repeal of the repeal on Dec. 31, 2010.)

Also, he predicts, no matter what happens, “there will always be some taxation on transfers of assets.”

In the meantime, from now until year 2010, there will still be estate taxes due, though at different levels than before.

Wait & See does allow policy loans and withdrawals, but these void the guarantee. It includes an accelerated death benefit provision for terminal illness on the surviving spouse. Up-front policy loads include premium expense, monthly expense, and monthly policy expense (three years). The guaranteed minimum interest rate is 4%.


Reproduced from National Underwriter Life & Health/Financial Services Edition, June 11, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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