In previous blogs I’ve discussed the use of Second-to-Die life insurance policies as a means to provide for estate taxes. Now that the estate tax exemption appears to have settled at $5,250,000 per person or $10,500,000 for a married couple and indexed for cost-of-living increases, the 40% tax rate will be of less concern to many people. The $1,000,000 exclusion which would have re-surfaced had congress taken no action, would have created a problem for many more people. Is there still a place for second-to-die policies? They are ideal for tax liquidity because with the full marital deduction the tax can effectively be postponed until the death of the second spouse. But what if the estate is below the taxable level?
Take the case of a married couple, husband age 65 and wife age 63. They are well off with assets necessary to maintain their lifestyle for as long as either one of them lives, but they are nowhere near the $10,500,000 threshold. They would feel good about leaving their children something after they are both gone…a legacy fund if you will. They like the idea of a $1,000,000 life insurance policy available at the death of the second of them. They are both classified as Preferred Risks (not Preferred Best, the lowest premium). Statistically, the wife will outlive the husband. She is younger and females have longer life expectancies than males.
If they purchase a $1,000,000 policy on her life with the premium guaranteed to age 121, the annual premium is $15,050. If instead they purchase a second-to-die policy guaranteed to the same point of time, the annual premium is just $11,700. If, against odds, the wife dies first, the beneficiaries would need to wait longer for the proceeds and the premium would need to be continued, but that scenario is highly unlikely. The more than $3,000 annual savings looks good. They could also consider placing $500,000 on each of their lives and the combined premium for both policies would be $18,155.
The point is, if the intention is to leave $1,000,000 after they have both died and are looking for the best Internal Rate of Return, the second-to-die policy looks good. However, if the age spread between the parties was greater and the underwriting class of the older partner was not as good as the youngest, then there might not be a savings by using a second-to-die policy over a single policy on the youngest, healthier partner. But, the second-to-die policy deserves consideration as a way for a couple to spend their kid’s inheritance while they’re both alive while still leaving something behind. Thanks Mom and Dad, Grandma and Grandpa!
Coming up, I’ll be discussing the importance of candor and full disclosure.