Survivorship life insurance, also referred to as second-to-die life insurance, has been primarily used for estate planning needs. With proper design and planning, a survivorship life insurance policy utilized for estate preservation can ensure estate taxes are covered and the estate’s assets are preserved for heirs. For many years, the ideal survivorship life insurance product for this design has been guaranteed survivorship universal life (GSUL), which offers a guaranteed death benefit for a designated duration (e.g., to the younger insured’s age 100).
Although estate planning continues to be a valuable use of this product, particularly for the wealthy marketplace, market pressures have led to less competitive and less attractive GSUL products.
In 2012, the National Association of Insurance Commissioners adopted revisions to Actuarial Guideline 38 (AG38) that focused on increased reserving requirements for guaranteed products. That led to price changes for many products, the majority of which were price increases. Some carriers opted to discontinue products, and some decided to completely exit the guaranteed marketplace, limiting the available GSUL product offerings.
Since then, sustained low interest rates have led many carriers to make additional price increases to their GSUL products, and many have placed premium restrictions on these products, further limiting their competitive scope.
Beyond product pricing and product offering issues, the life insurance marketplace has been impacted by tax law changes that have increased liabilities for most taxpayers. The top income tax rate is now 39.6 percent (up from 35 percent), and the top rate on long-term capital gains and qualified dividends is 20 percent (up from 15 percent). The federal estate and gift tax rates were also increased from 35 percent to 40 percent. Additionally, in 2013 a new Medicare surtax was introduced that adds a 3.8 percent tax on the lesser of net investment income or excess of modified adjusted gross income over specific thresholds.
The lingering uncertainty over the economy has also shifted consumer views regarding the need for life insurance and its application in today’s economic environment. The “LIMRA Consumer Sentiment Tracking July 2013 Update”noted that “slightly more than half of Americans (54 percent) have an unfavorable view of the economy — the lowest percentage since LIMRA started tracking consumer sentiment in March 2008.” It also noted that “the worse people feel about the economy, the more concerned they are about their own financial well-being.” For this reason, many consumers are seeking out alternative strategies to plan for their financial well-being, not just that of their heirs.
All of these changes have shifted how survivorship life insurance is being utilized, as well as the demographic being attracted to this product. Due to its popularity as an estate planning tool, SUL was generally seen as best suited for older insureds. However, it also has valuable applications for today’s younger insureds.
One area in which survivorship life sales have experienced growth is the cash accumulation space, utilizing products like current assumption SUL and indexed SUL. Although these products still offer the main benefit of life insurance — death benefit protection — they also offer cash value accumulation that can be used for multiple needs. Here are three.
Need: Retirement income
The “LIMRA Consumers’ Retirement Perspectives Fourth Quarter 2012” report noted that “only 1 in 5 working consumers — and only 1 in 4 of those age 55 or older — is saving 10 percent or more of their annual income for retirement.” It also stated that “the vast majority of workers (80 percent) believe they need to save more to be on track for retirement.”
In many cases, those saving for retirement are doing so via vehicles like a 401(k) or an individual retirement account. And although these are great retirement savings tools, they are potentially subject to taxation, as any gain in these accounts is considered ordinary income when the funds are withdrawn.
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For this reason, many financial advisors that understand the tax advantages of life insurance recommend their clients use a cash-accumulating life insurance contract to supplement their retirement income. Any cash accumulation within a life insurance policy is grown on a tax-deferred basis, and in the majority of cases, these earnings can be accessed by the policyowner income-tax-free. (For more information on tax treatment of life insurance policies, see Internal Revenue Code (IRC) Sections 72(e)(1), 72(e)(5)(C) and 101(a)(1).)
Most advisors will recommend an individual or single-life insurance policy when structuring this design for their clients; however, there are certain circumstances in which a survivorship policy could be a better option. This is particularly true when one insured is healthier than the other, especially if one of the insureds is considered “uninsurable” based on carrier medical underwriting guidelines. This can also be the case if one insured is significantly younger than the other.
Depending on the competitiveness of the product being used and how the policy is structured, using a cash-accumulating survivorship product can potentially provide insureds with a higher income return than taking income from an individual life policy. For many scenarios, this holds true even if that individual policy was taken out on the healthier and/or younger insured. This occurs because premiums for a survivorship policy are based on the joint life expectancy of the insureds, resulting in improved mortality assumptions. The charges associated with a survivorship policy are generally lower than those within an individual policy. This lower charge structure allows the policy to accumulate cash value at a faster pace, hence the potential higher income availability.
This design can also be attractive to younger insureds who may not have the cash flow to fund two separate policies that can provide the desired death benefit and returns. With a cash-accumulating survivorship policy, they can take advantage of the lower charge structure to: 1) purchase a higher death benefit amount that would provide protection to their estate and heirs, 2) accumulate cash value on a tax-deferred basis that can be used to supplement their retirement, and 3) create flexibility for their future via a policy whose cash value can be transferred to another life insurance policy if their needs change over time and there is a better-suited product, or surrendered if they were to decide they no longer need the policy.