Greater Interest In Alternate Uses
With the tax picture fuzzy, second-to-die's other benefits have become more salient, since those may be the only ones that the client will ultimately enjoy. "We are seeing a whole lot more discussion about the non-tax purposes" of survivorship insurance, Scroggin says. Consider the small-business owner who anticipates that at least one child will work in the enterprise but not all will. Those who won't should not inherit business-ownership interests, Scroggin asserts. If they do, "you've tied (all the heirs) together financially, and as time goes on, that creates conflicts in the family," he says. But when the private company is the lion's share of the owner's net worth-which it often is-cash is needed to pay off those who do not inherit it. "We use a second-to-die policy as a funding vehicle to equalize the estate at Mom's death, since in most cases we want to give her an income stream from the business until she dies. The insurance fits well in that context," Scroggin says.
For the philanthropic client, survivorship coverage can offer simplicity plus wealth replacement. "We have clients who say, 'I don't want to have this trust or that trust. Everything goes to charity,'" says Daroff. That entitles the estate to a charitable deduction for its total value. "So there's zero estate tax, with or without repeal," Daroff says. The second-to-die policy supplies the kids' inheritance.
A special-needs child who cannot work to support himself can benefit from survivorship coverage, says AXA Financial's Lovier. "You worry that if both working parents die, who will take care of the child? We see survivorship insurance used to meet that need."
Product Features To Pursue
When utilizing second-to-die insurance, be sure to get policies carrying the latest options, especially split coverage, a feature introduced prior to EGTRRA that has bloomed in popularity post-enactment. The couple can split the joint coverage into individual policies if the estate tax is repealed or if there is a divorce, says life insurance consultant David K. Bohannon of Consultants Corner Inc., in Louisville, Ky. That could be useful, for example, if circumstances change and one spouse will need income should the other perish. "A couple with a $5 million policy and the split option may have enough in the contract to fund a $2.5 million individual policy without the need for any additional premiums," Bohannon says. The cost is minimal-some companies charge nothing-but the real boon could be that many carriers will let you divide the coverage without proving insurability.
Regarding the surrender-charge waiver mentioned earlier, be sure to read the fine print before buying. Equitable, for instance, waives the charge on either a policy surrender or reduction in face amount (should the client need less coverage than originally anticipated), but other carriers dispatch with the fee only on full surrender.
You should also be aware that many traditional universal-life products now come with a guarantee, a wrinkle instituted by the industry not because of EGTRRA but due to the havoc wreaked on variable policies by the bear market. Under the guarantee, when the client makes timely payment of the premium and avoids policy loans and withdrawals, the insurance company warrants that the policy will be fully paid regardless of changes in interest rates, Lovier says. "There may be no cash value in the product at some point, but the policy won't ever lapse. The insurance will be there."
If the industry's product-development response to the 2001 act seems languid, it is also calculated. Carriers are merely biding their time, according to one insider, hoping that eventually Congress will vote against total repeal of the death tax. But regardless of which way the ax falls on that issue, once the element of uncertainty is erased insurers expect survivorship policies to gain favor-and we know how their last prediction turned out.