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Transamerica Sunset Option Targets Estate Tax Uncertainty

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Transamerica Sunset Option Targets Estate Tax Sunset Uncertainty


“The Sunset Provision creates so much uncertainty moving forward that we concluded that special consideration is necessary to support sound tax and estate planning efforts.”

So begins the explanation Transamerica Occidental Life Insurance Company is giving to new survivorship policyholders about an option it now offers with three survivorship policies–two universal life contracts and one variable universal life contract.

Available at no extra cost, this Sunset Option, as it is called, allows policyowners to make full surrenders of their in-force survivorship policies, with no surrender penalties, during the year 2010, if the repeal of federal estate taxes extends beyond Dec. 31, 2010.

This option is being offered in a letter the insurer is sending to owners of survivor policies issued June 7, 2001, or later. The letter has the weight of a policy endorsement, say executives.

The repeal to which the letter refers is the phaseout of estate taxes that will occur gradually over the next 10 years, until Dec. 31, 2010, under terms of the recently enacted Economic Growth and Tax Relief Reconciliation Act of 2001.

A sunset provision in the tax act will restore the original estate taxes, on Jan. 1, 2011.

The question many people have is whether Congress will restore, amend or abolish estate taxes in the interim, thus voiding the original sunset provision.

If estate tax repeal is extended, then people who buy survivorship policies today to cover their estate tax exposure may no longer need their policies, says Joel Seigle, senior vice president-life insurance and annuity products for Transamerica Insurance & Investment Group, a unit of the Los Angeles insurer.

Transamerica developed its Sunset Option to address that concern, he says.

The option does this by allowing policyowners who want to get out of their survivorship contracts, due to an extended repeal, to do so in year 2010–and under favorable circumstances (i.e., no surrender charges).

The two UL policies that now offer this option levy surrender charges for 20 years, he points out. And the VUL does so for 15 years.

Therefore, owners who make full surrenders in year 2010 can save a substantial amount of money, because they are free of several years of surrender charges they would otherwise have to pay.

To illustrate, Seigle gives this example: Assume a 70-year-old man, rated standard Table D nonsmoker, and a 67-year-old woman, rated preferred nonsmoker, buy a $3 million UL (TransSurvivor XL) this year.

Assuming the declared interest rate (6%), this couple could save nearly $47,000 upon a full surrender if they exercise this option, he says.

Heres how it works: The couple would have paid in $420,150 in premiums ($42,015 per year) over the 10-year period. At year 10, the accumulation value, assuming the declared rate, would be $311,493 while the cash value would be $264,813. Since the surrender charge would be waived, because of the option, the couple would receive the full accumulation value of $311,493not the smaller cash value ($264,813).

Not only does the couple in this example pocket the $311,493, says Seigle, but they also wind up with a good buy on survivorship coverage for the 10-year period when they needed it.

Thats because the average cost of coverage for this $3 million contract works out to be $10,865 a year, he says. ($420,150 in total premiums minus $311,493 in full surrender value equals $108,657, which, divided by 10 years, produces $10,865 a year.)

This option is only available for survivorship owners making full surrenders, Seigle stresses. For partial withdrawals in 2010 (or any other year), the insurer still deducts the applicable surrender charges.

The purpose, he says, is to give clients the flexibility they need to make long-term planning decisions today, without worrying about what Congress may or may not do about estate taxes in the future.

Traditionally, he points out, the planning process for older affluent buyers begins with existing tax law.

Since, under the new law, estate taxes exist for every year except 2010, that approach is still wise for most potential buyers, he says. Therefore, he predicts most will continue to view survivorship coverage as the cornerstone of their estate plan–typically to pay estate taxes.

But if the estate tax situation should change, clients who own the Transamerica contracts can now surrender them without paying surrender charges, he reiterates.

Some buyers may not surrender, even if they can, he adds. For instance, some may want to keep their policies for capital gains or state inheritance tax purposes.

The point is, he says, owners now have additional flexibility. Thats what Transamerica agents said they wanted when asked about their views on the estate tax deliberations, he recalls. “They told us they want flexible solutions,” whatever the outcome of the deliberations.

The feature is offered in all states but New York. It can be exercised only in 2010. Full surrenders before or after that will continue to be subject to surrender penalties.

There is no cost because, after assessing the scenarios where the option might come into play, the insurer felt “comfortable” with not charging for it, says Seigle.

From a sales standpoint, he maintains it gives agents another reason to look at Transamerica. “To the extent a company can bring advisors innovative solutions to real problems and real needs, we think the company will be more attractive,” he explains.

And that, he says, should help Transamerica maintain its position as a large player in the survivorship market.

Reproduced from National Underwriter Life & Health/Financial Services Edition, July 27, 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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