Permanent life insurance in today's market is available in many forms. While policies offered in the past were more about building cash value, modern life insurance products offer additional solutions that don't always involve a need for cash value. Products such as no-lapse, guaranteed survivorship universal life insurance, often referred to as "second-to-die" policies, can offer death-benefit guarantees at lower premiums, which may provide a better solution for your client's life insurance needs.
No-lapse guaranteed products
The purpose of a no-lapse guaranteed product is to provide the most amount of permanent insurance coverage for the least amount of cost. Although this product will eventually have no cash or surrender value, it will have a death benefit guaranteed to stay in force for life, assuming the contract owner has paid the planned premiums as agreed). Remember that all guarantees are subject to the claims-paying ability of the issuing insurance company. Please keep in mind that as your client's personal situations change (i.e., marriage, birth of a child or job promotion), so will his life insurance needs. Care should be taken to ensure these strategies and products are suitable for long-term life insurance needs. Additionally, the tax consequences of liquidating current assets should be considered. These strategies may create a larger income tax-free inheritance than maintaining current assets. However, the life insurance death benefit may still be subject to estate tax at death.
On a survivorship policy, the death benefit is paid upon the second insured's death. Therefore, premiums are lower for one survivorship policy on two lives (i.e., $500,000) than two policies on two single lives ($250,000 and $250,000). When you combine the survivorship design with a no-lapse guaranteed design, you have a more affordable product that allows for a larger death benefit to be purchased at a lower premium than you would usually find with cash-accumulation-type products. This article will address the use of a no-lapse guaranteed survivorship universal life insurance in second marriages.
The creative use of trusts and proper use of life insurance can help solve the financial issues inherent in second marriages that involve children. Both individual and survivorship life insurance can play a role in developing a plan for a family facing such issues.
The creative use of trusts and proper use of life insurance can help solve the financial issues inherent in second marriages involving children.
Case in point
Consider the fictional case of Tony and Tina (both age 45 and nonsmokers), who have each been married before. Tony has two children from his previous marriage, and Tony and Tina have one child together. Tony brought significant wealth to the marriage, while Tina did not. They have agreed that upon Tony's death, half of his wealth should go to his three children, and half should go to a qualified terminable interest property (QTIP) trust for the benefit of his wife. Upon Tina's death, the remainder would be distributed among Tony's three children.
Here's what they decide to do:
- Tony, with the help of an estate-planning attorney, establishes an irrevocable life insurance trust (ILIT) to provide estate liquidity for the portion of his estate that will be left directly to his children and subject to estate tax. It is estimated that at Tony's death, his estate will be worth $10 million. This takes into consideration the estimated income (such as salaries and investment gains) and outflow of funds (such as living expenses and life insurance premiums) over this 20-year period.
- The trust purchases $1,350,000 of no-lapse death benefit with a no-lapse guaranteed universal life insurance policy to cover the estate tax due.
- Tony gifts the premium of $13,845 each year for 20 years to pay for the policy that will fund the trust.
At the same time, Tony and Tina establish an ILIT to provide liquidity for the portion of the estate that will pass to the children at Tina's death and be subject to taxation at that time. This trust purchases $1,350,000 of no-lapse death benefit with a survivorship universal life insurance policy. Tony and Tina gift annual premiums of $7,674 for 20 years to fund the trust.
Upon Tony's death (assumed at age 65 and using 2007 tax tables):
- $5 million will go to Tina's QTIP trust to take care of her for the remainder of her life.
- $1,350,000 will go to the IRS for estate taxes.
- The remaining estate of $3,650,000, plus the death benefit of $1,350,000, for a total of $5 million, will go to Tony's three children.
Upon Tina's death:
- $1,350,000 will go to IRS for estate taxes.
- The remaining $3,650,000, plus the $1,350,000, for a total of $5 million, will go to Tony's three children.
Keep in mind that should Tina die first, her exemption will be lost and additional estate taxes would be due upon Tony's death.
For certain types of planning in which the guaranteed death benefit is the focus, a no-lapse guarantee survivorship universal life insurance policy may be ideal. This product may help your clients protect their loved ones and ensure that their financial futures are secure.
Shawn Britt is a senior advanced sales consultant with Nationwide. Andrew Shapiro is director of advanced sales, also with Nationwide.