The prime reason for survivorship life is to provide liquid funds at the death of a surviving member of a couple, usually to pay the federal estate tax. Earlier this month, proposed estate tax changes (this time tied to a raise in minimum wages) failed in the U.S. Senate again after passing in the House.
While the political football game seems to be over for now, it still leaves our industry offering a solution to a vexing and complicated system whereby the federal estate tax reduces and disappears by 2010. It then magically reappears at older and higher rates in 2011. Other than bad luck for the heirs of people who die on New Year’s Day of 2011, it also means that demand for survivorship life’s “pennies on the dollar” solutions will be required to help offset the tax burdens to come.
There are many more reasons to offer and buy survivorship life, but for now at least we have the somewhat likely future of a federal estate tax. And you didn’t think the states were going to let anyone off the hook soon either, did you?
The excerpts in this report focus on illustrated values for whole, universal, indexed 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 SUL and SVL charts that 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.
Full Disclosure software includes complete policy specifications and features, current and guaranteed costs and expenses, and a wide sampling of illustrations. The edition of Full Disclosure that included the information in these excerpts was released in June. Policy data is current as of May 1, 2006. Standardized annual premiums are the same between universal and variable life illustrations, and the variable life 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–for instance, maximum cash accumulation or none at all–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 look at what it is designed to do best. That is the key to any successful comparison in this time of product specialization. Also, the market is adding new hybrid, indexed and guaranteed premium variations (of flexible premium products) to the mix. Often, simply looking at the numbers doesn’t tell you enough.
There’s a wealth of opportunities for a product at the critical juncture in time that is the death of the second spouse, including family business continuation, funding a grandchild’s education, providing for a special needs child who needs care after both parents die or boosting a charitable giving intention. The product is also a good way to leave a legacy of giving and opportunities to others via a school endowment, for example, that appeals to our need to know we can continue to do good even after we are gone.