Dont Bury Second-To-Die Yet

By Daniel Munroe

In the French Quarter of New Orleans, a funeral is a noisy affair. A jazz band and marchers join pallbearers as the casket of the departed is transported through the streets like some morose float in the Rose Bowl Parade.

Recently, the music has been playing loudly for second-to-die life insurance amid predictions that sales of the policies would soon die of an uncertain estate tax and political environment. The Internal Revenue Service reported that only 2% of the estates of people who died in 1999–or roughly 50,000–paid the estate tax. The membership of that exclusive club is expected to dwindle to less than one-half of 1% or approximately 12,500 estates when the estate tax exclusion increases to $3.5 million per individual in 2009.

Consequently, anyone who regularly sells second-to-die policies for estate-planning purposes may soon find themselves without a market, the pundits predict. While its true that second-to-die life insurance sales have declined industrywide while Congress debates the fate of the estate tax, predictions of the policys demise are gravely premature. Thats because second-to-die policies have many uses beyond simple estate planning. These include:

  • Creating liquidity to pay capital gains taxes. Current law calls for the estate tax to be repealed in 2010, substituting a modified carry-over basis income-tax regime for the current stepped-up basis. This means that anyone who inherits a business, real estate, qualified pension plan, stock or other asset with a low basis could be subject to a capital gains tax liability. Clients who desire a cost-effective way to pay for any capital gains taxes they potentially incur from selling an inherited asset will be excellent candidates for second-to-die insurance.
  • Passing an inheritance to children. Many parents eschew the “Im Spending My Kids Inheritance” philosophy that is often advertised on the bumpers of luxury cars. Given the current bear market, these clients may be reluctant to “spend down” their net worth out of fear that nothing will be left at their death. Second-to-die life insurance offers a tremendous solution to this problem, enabling your clients to spend assets now and still be assured their children will be left with a sizeable inheritance.
  • Equalizing the value of estates among heirs. The Small Business Administration reports there are 25 million family-owned or closely held businesses in the United States. Many of those business owners want to ensure that all of their surviving children receive a fair share of the estate, even if some children are not involved in the business itself. The proceeds from a second-to-die life policy can be used by the children who are not involved in the business to “buy out” their siblings who are involved.
  • Passing wealth to multiple generations. Second-to-die policies offer an excellent way for families not only to enhance their wealth, but to pass it on to future generations. This can be accomplished through the use of Dynasty Trusts and shrewd financial planning. Assets are transferred to the trust using the generation skipping transfer tax exemption and purchase a second-to-die policy, typically variable universal life. The policys death benefit immediately enhances the value of the trust and therefore the inheritance for future generations.
  • Insuring an uninsurable spouse. Some clients have a spouse who is uninsurable. For example, a wife might be a Hodgkins Disease survivor and uninsurable, but likely to outlive her much older husband. Second-to-die life insurance allows for the spouse to obtain meaningful coverage to remedy a number of estate planning concerns.
  • Balancing the distribution of assets within families. With the traditional family becoming the exception and not the rule, planning concerns for blended families have come to the fore. In second marriages, for example, second-to-die life insurance can balance the distribution of assets, provide peace of mind and preserve familial harmony.
  • Replace the value of assets used for charitable giving. Many clients are considerably more charitably inclined when they learn that they dont have to lose control or access to their assets. A charitable remainder trust can help clients generate income from low basis assets without paying capital gains taxes. Adding second-to-die coverage to the equation helps ensure that your clients children receive their full inheritance. Talk about building a bridge to the next generation!
  • Providing for special needs children. Leaving a direct inheritance to a special needs child may cause the loss of government income and health benefits under Medicaid and Supplemental Social Security and Disability plans. Second-to-die coverage, combined with a Special Needs Trust, solves that problem by creating a source of cash for a disabled childs care.
  • Covering educational costs for children in the event of a double tragedy. Second-to-die insurance provides a funding vehicle for couples who want to ensure their children can attend college if both parents die young.
  • Planning for the return of the estate tax in 2011. Current law calls for the estate tax to be repealed in 2010 and return in 2011. The highest marginal rate would be 55% and the applicable exclusion would be $1 million per individual. With federal budget surplus projections dwindling and government spending on the rise, a permanent repeal of the estate tax is unlikely at best.

Whats the bottom line? Second-to-die life insurance is not just to pay for estate taxes. Applications for this product are numerous and diverse.

With Congress deadlocked on whether to eliminate the estate tax, its difficult to predict what the future holds for second-to-die policies as an estate-planning tool. That should not stop you from using these policies to meet other, sometimes overlooked, financial problems that your clients may have.

By focusing on your clients financial needs and applying some creativity in the planning process, you are sure to find many applications for second-to-die life insurance. And the music you hear will be for a victory dance instead of a funeral march.


Reproduced from National Underwriter Life & Health/Financial Services Edition, August 5, 2002. Copyright 2002 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.