When it comes to survivorship life, many in our industry are fixated on the federal estate tax: Will it or won’t it be eliminated for good? Will it sunset and then return? This “boomerang tax” may come and go and continue to be a political football forever, so the only thing we know is that we don’t know what will happen on the federal level. Many are coming to the conclusion the so-called death tax is never going to go away completely, and its relevance as a deal maker or breaker is becoming irrelevant for a number of reasons.
Demographically, we’re going to have a slew of older Americans who need survivorship life for many reasons other than the federal tax. By 2035, the number of over-70s in the U.S. will more than double from 26 million today to 57 million. Even the best “super-preferred” applicant is going to find term very expensive in his or her 90s, and initiating an individual policy at older ages (unless the goal is asset transfer) will be prohibitively expensive even with adoption of the standard mortality tables.
These aging baby boomers, written about often because of their significant estates compared to previous generations, are going to have financial planning needs that make survivorship life the product of the future. Of course, not all of these newly aged people may be in the best shape from an underwriting standpoint. The low cost of SL with the ability to have an “uninsurable” life in the equation at many companies (if the other life is above a Table 6, or so) is the ideal product at the ideal time for people who have financial planning needs beyond the ‘there it is, now it’s gone’ federal estate tax.
One of the emerging trends that ensures liquidity will be required after the second death is state inheritance taxes separate from the federal tax as a way to raise revenue.
The excerpts in this report focus on illustrated values for whole, universal and variable life survivorship products from the leading companies in the market. And while these charts are only slices of the Full Disclosure database, they will give you an idea of how these products perform on a prospective basis. The additional components in the latest edition of Full Disclosure are low-cost, long-term guarantees of premiums and death benefits in flexible-premium policies for both SUL and SVL policies. These tables provide minimum annual premiums to age 100 or beyond (lifetime) with little or no cash value at maturity.
In addition to the guaranteed premium charts, three others cover current illustrated values for variable, universal and whole survivorship life. These illustrated values are based on current interest or dividend crediting, expenses and, in the case of variable designs, a predetermined crediting rate. Full Disclosure applies the internal rate of return method to current illustrated accumulation values and current death benefits measured at policy durations 30 years dependent on age combination. The IRR of cash values rises over time, as the IRR for the death benefits falls.
A careful analysis of the IRR measurements indicates which policies are designed (in an illustration at least) to build current cash values, guaranteed cash values or death benefits. You will notice at the end of each chart (SVL and SUL), there are columns showing how the policy would have performed under an increasing death benefit option. The cash value of an increasing death benefit policy, while not listed, would be lower because of the added costs of insurance. The whole life policies have naturally rising death benefits due to the paid-up additions dividend option.
Policy data in these excerpts is current as of Nov. 1, 2005. Standardized annual premiums are the same between UL and VL illustrations, and the VL illustrations are based on a 10% gross rate of return with average subaccount expenses “netted out” of the projected values.
Because survivorship life products are designed for certain objectives, whether maximum cash accumulation or none at all, for example, we have summarized what each is designed for. Some have simplified underwriting, short-term values, living benefit riders or many others. We not only examine a product’s premiums and illustrated values, but get to what it is designed to do best. That is the key to any successful comparison in this time of product specialization. Often simply looking at the numbers doesn’t tell you enough.