Although clients have concerns about paying annual five-figure insurance premiums, Barry says that SLI works well for people with real estate holdings, rollover IRAs and substantial investments in municipal bonds or annuities. IRAs can present a particular problem because they are subject to both estate taxes and federal income taxes. Someone who had to liquidate a $1 million rollover IRA would pay 70 cents on the dollar to the IRS.
Barry often uses immediate annuities as a way to both fund an SLI policy and provide clients with more annual income. Example: A couple, both 70, sell their $2 million investment in tax-free bonds and purchase a joint and survivor immediate annuity.
The net after-tax annual income from the immediate annuity is $122,000, compared with just $45,000 that they had been getting annually from the tax-free bonds they sold. Meanwhile, Barry uses $52,000 of the immediate annuity income to fund a life insurance trust to pay an estimated $2.8 million in estate taxes when the second spouse dies. The remaining $70,000 is annual income to the couple.
Gary Hagar, president of Integrated Wealth Management in Edison, N.J., says he uses SLI with business owners. The life insurance is not subject to creditors' claims. He also uses SLI in deferred compensation plans. The reasons: The mortality and expense charges are low. The policyholder can make tax-free withdrawals for income, which can't be done with an IRA or 401(k) pension plan.
"It (SLI) makes sense as a cash accumulation vehicle," Hagar says. "You can get the greatest possible value at the lowest possible cost."
Despite the advantages, there also are drawbacks. Grant Rawdin, CFP, JD, president of Wescott Financial Advisory Group LLC in Philadelphia, says insurance premiums may be excessive. Someone, for example, with an estate worth $20 million may not want to pay a $500,000 annual premium.
"Survivorship life is often sold to people who don't have liquidity problems and don't need the coverage," he adds. A liquid estate likely could get better returns off investments through different types of trust arrangements, which also can move assets out of the taxable estate," he adds. "But survivorship life insurance does create liquidity. You have leverage if the person predeceases."
Other issues: People with health problems may not be insurable, or they may pay astronomical premiums for coverage. A divorce also could throw an estate plan out of whack. The client may not want to cover a divorced spouse.
"I would use survivorship life in limited circumstances," Carnack says. "You may have a child with special needs. The proceeds would provide wealth replacement to protect the child." Financial professionals report that baby boomers are looking at estate planning at a much earlier age than their parents did. This gives them time to evaluate all client options.
"Today, you must take a comprehensive planning approach to estate planning, rather than just buying a life insurance policy," Carnack says. "In some case it might be better to pay the estate tax bill today, rather than when the value of someone's assets has increased dramatically."