VERSATILE, MULTI-PURPOSE SURVIVORSHIP UNIVERSAL LIFE

VERSATILE, MULTI-PURPOSE SURVIVORSHIP UNIVERSAL LIFE

Not Just For Estate Taxes Anymore - Survivorship Life for People Not Exposed to Federal Estate Taxes. 

Six general reasons for purchasing SUL, only one of which (a relatively minor one) was for federal estate taxation. Ranked by frequency, here is the order of needs behind the purchase of Survivorship Universal Life:

􀁸 35% of new SUL purchases are designed to fund long term care expenses, if necessary;

􀁸 20% of new SUL’s are replacing and upgrading (modernizing) existing survivorship coverage;

􀁸 15% are purchased as a non-correlated asset for an investment portfolio;

􀁸 10% are for estate equalization purposes;

􀁸 10% are to fund special needs trusts;

􀁸 10% are to fund federal estate taxes.

Interesting, isn’t it? We’ve listed federal estate taxes dead last; sixth out of six reasons to make an SUL purchase. While federal estate tax exposure has greatly declined with the increase in estate tax exclusion to $5,450,000 in 2016 ($10,900,000 for married couples) thereby sharply reducing the need for a life insurance solution to pay taxes, the versatility and economy of SUL is lending itself to many other purposes.

Estate planners and financial advisors are now using SUL to address a variety of estate and legacy issues for more modest, not-federally-taxable estates. One quick defining comment about SUL before we embellish on all six purchase motivators: survivorship life insurance is joint, last to die coverage. No death benefit is paid until both insureds have passed away and that fact makes SUL inexpensive and highly efficient. 

Funding long term care expenses.

This is the newest best reason to purchase survivorship coverage. We can now (new in 2015) add a long term care insurance rider to SUL. The rider allows long term care coverage on both lives insured on the survivorship chassis. Unlike some other varieties of LTC riders and SUL plans, both insureds can be on long term care claim at the same time and they do not have to be a married couple. Let’s talk about how the rider works first and then we’ll move into the flexibility of the SUL chassis. Long term care riders are real long term care insurance instruments, just like free standing long term care insurance.

You qualify for claim the same way, tax-free claim payments are made the same way and, most important, the range of care allowed is the same—home care, facility care, day care, etc. Riders are qualified long term care insurance plans under IRC Section 7702—again, just like free standing long term care policies. 

The only difference is this: free standing long term care insurance policies create a coverage pool; long term care riders provide claim payments by drawing down on the death benefit of the life insurance chassis. Riders, then, allow the death benefit to be double duty dollars payable at long term care claim, or death, or both. This draw down, called an acceleration of the death benefit, is what allows long term care riders to be a fraction—often 20% or less—of the cost of free standing long term care insurance.

The flexibility of SUL as the chassis to make everything work is near infinite as long as there is a relationship between the insureds. They may be business partners, a same-gender married couple, a mother/son or father/daughter combination—you name it. 

These last combinations are very interesting in the context of “sandwiched generations,” where people worry about long term healthcare for the generations above and below them. The example of the 50 year old Generation-x person comes to mind where concerns about his own personal financial welfare (and how a major healthcare event could impact that) are  sandwiched between similar concerns for his elderly parents and college age children.

Think about insuring that Gen-x male and his elderly mother with survivorship life + a long term care rider. Or an affluent 70-something father and his not-so-affluent daughter. What a marvelous way to protect against the ravages of long term healthcare for a parent or child when one generation has the financial means to do so and the other doesn’t. With an SUL chassis, premium structures can be designed to be limited pay—paying for 10 or 20 years for example, or to the payor’s age 65. This new survivorship universal life + long term care rider combination, especially for pairings beyond the traditional husband and wife, is revolutionizing insurance protection options for life and long term care. 

Replacing and upgrading (modernizing) existing survivorship coverage.

Survivorship life insurance is permanent insurance designed to provide a death benefit to complete a plan when a couple has died. Unless there is a strategy in place to deploy cash value during lifetime, many survivorship owners or trustees see dvantages in replacing existing survivorship policies with less expensive new plans that are not designed to develop much cash value. The existing cash value can be deployed in the new plan by increasing the death benefit, reducing the cost or number of years to pay premium, or all of these.

Further, survivorship contracts issued before 2015 do not include long term care riders, and replacing old with new can include this benefit. Even trust-owned survivorship policies, owned by irrevocable life insurance trusts or special needs trusts can include these riders. Another advantage in replacing old survivorship life insurance with new is pricing. Survivorship life is a purchase usually made decades before the second insured passes away. But life insurance is now a bit like electronic devices—every few years new life insurance products are introduced that are cheaper, more efficient and with better features and benefits. A quick examination of an existing survivorship life policy may easily lead to new and better options to consider. 

Survivorship life insurance as a non-correlated investment portfolio asset.

Wealth managers have embraced this idea in recent years. What if we could demonstrate an alternative investment?

Alternative as in not exposed to the vagaries of the stock markets, not subject to interest rate fluctuations, not riding up or down with property values. Survivorship universal life is just such an instrument and we demonstrate that by calculating the yield one would have to earn on all the premiums paid for SUL to realize the amount paid by the insurer at death. Here’s an example we have in house now.

A 65 year old male/female couple have an exact premium amount they’ll pay every year: $18,337. That premium will purchase $1,412,000 of SUL. The couple’s life expectancy is age 93 for the last to die—28 years out. The interest rate they would have to earn on $18,337 invested annually for 28 years to yield $1,412,000 is

6.34%. A pretty competitive return—but remember, life insurance death benefits are tax free. In a 35% tax bracket, 6.34% tax free equates to 9.75% taxable. Compare 9.75% to other taxable investments and the SUL purchase looks amazing. Now factor in risk. The investment risk associated with a life insurance purchase with guaranteed rates and values is essentially zero. Any investor would be hard pressed to see a 9.75% return with no investment risk. 

Survivorship life insurance in estate equalization planning.

What happens when a single asset dominates an estate with multiple beneficiaries? The answer, sadly, is that the asset must be sold off to provide cash for equal distribution. An obvious example is an estate with modest cash, home, furnishings and other assets plus a large ranch. Let’s further assume the estate has two children beneficiaries, a son who is an accountant in the city and a daughter who lives on, works on and loves the family heritage of the ranch.

If the ranch is valued at more than 50% of the gross estate—likely in this case and other examples of family farms, ranches and businesses—equal distribution is attained only with difficult or unpleasant outcomes. Life insurance, and SUL in particular, can infuse cash into a single asset-dominated estate to ease the distribution to estate beneficiaries at death. 

Special Needs Trust funding.

Injecting cash into a special needs trust is one of the best uses of survivorship life insurance. Kids with special needs routinely outlive their parents. That wasn’t the case not-too-many-years-ago, but it is now and is a major driver in financial planning for special needs families. Special needs trusts isolate assets from ownership by the special needs family member and the recognition of income. Owning assets and earning income can disqualify a person from government assistance programs

and the often vital access to healthcare insurance. Funding a trust is often an impossible challenge for families during their lifetimes, but SUL provides an extremely efficient and affordable way of injecting cash into a special needs trust when the couple passes away. At normal life expectancy, the total of premiums paid can be as little as one-sixth of the death benefit, so the leverage and the tax free payment of the life insurance death proceeds into the trust represent an appealing trust-funding strategy for most people. 

Survivorship Universal Life to pay for federal estate taxes.

Survivorship life insurance was invented to pay federal estate taxes. The typical strategy was to have an ILIT (an irrevocable life insurance trust) own the survivorship life policy on a married couple. The couple would gift amounts to the trust to allow it to pay the premiums and the trust would be the beneficiary and receive the life insurance proceeds when the couple had both passed away. The trust would then use the proceeds to pay the federal estate taxes due at death. The net result was that total premiums paid would be a fraction of the death benefit received, so estate taxes were paid with pennies on the dollar. 

The strategy is still enormously sound. And the leverage and efficiencies of today’s survivorship life products, especially survivorship universal life, make this the best insurance purchase decision perhaps ever. The only reason estate taxation has fallen as a major purpose for survivorship life is the dramatic reduction in the number of estates actually paying federal estate taxes.

As federal estate tax exclusion thresholds have moved up in the past two decades, state inheritance and estate tax guidelines have delinked from federal levels often exposing estates to significant tax bills at the local level—even when such estates are not taxed at the federal level. Even for modest estates below any federal or state tax exposure, survivorship life insurance can infuse funds into an estate for clean up and other final expenses and, of course, for bequests.

Surviving Survivorship Life

One last point, especially about survivorship UL or survivorship whole life purchased more than ten years ago. Survivorship life is an efficient purchase on two lives and today’s plans are often actually less expensive than coverage either insured can purchase individually. This is especially true with great age disparities between the insureds (most especially in the inter-generational examples cited earlier.) Older survivorship versions were less efficient, though, and policies with only one insured remaining alive should be reviewed in the context of more efficient single-life policies available. This assumes, of course, the surviving insured remains insurable at a reasonable rate class.