Despite the uncertainty over the eventual fate of the estate tax in 2010, sales of survivorship life insurance–which pays the estate taxes due at the death of a second spouse–are up. According to LIMRA International, the life insurance trade group, sales of survivorship, or second-to-die, life insurance rose 15% through the first three quarters of 2004 over the same period in 2003. "Advisors are telling their clients that they don't know what's going to happen [with the estate tax], so [clients] better hedge their bets," says Doug Israel, senior VP of life and annuity product development at AIG.
Many elderly clients in the midst of estate planning are heeding their advisors' advice. Clients "just don't want to take the chance that estate taxes will be there," says Craig Waddington, VP and actuary at MassMutual Financial Group in Springfield, Massachusetts. But some clients are still sitting on the sidelines, as evidenced by the flat sales of MassMutual's second-to-die insurance in 2004, he says. (Survivorship insurance sales at MassMutual were up 20% in 2003 over 2002, Waddington adds). Waddington says some clients are indeed waiting to see what will happen with the estate tax, but he warns that by not purchasing now, they risk becoming uninsurable later because of health reasons.
Such die-hard (no pun intended) clients may be glad to know that insurers are designing products that allow them to take a wait-and-see attitude, Waddington says, so policyholders can "lock in their insurability, but still not be charged a ton of money." Clients can pay a small premium, "and if estate taxes go away," he says, "they can cancel the policy. If estate taxes reappear, they can then start funding the policy or convert it into the full policy."
Laura LaTourette, a planner with LaTourette, Reichert & Associates in Dahlonega, Georgia, says most clients who are looking to purchase a second-to-die policy get "sticker shock" when told how much their annual premiums will be. Depending on the size of the estate, LaTourette has seen annual premiums ranging from $39,000 to $59,000. Because she's independent, LaTourette points out, she can shop around for the best deal. "Different companies, depending on the circumstances, will give me a different premium," she says. "It's not like I can go to one company and know I will always get the best premium because [insurance companies] are always looking at the client's health."
Even if the estate tax is phased out, clients will still be subject to their state's estate taxes. "The state inheritance tax will still be there," Waddington says. Most states that do levy an estate tax base the inheritance tax on the federal tax rate, he says. "If the estate tax goes away, states are going to have to change the way they collect taxes." Not every state has an estate tax, but more states are enacting one because they need the revenue, adds Lester Lovier, VP in the life marketing group at AXA Financial in New York.
These days, the most popular second-to-die products offer a guaranteed death benefit. "The vast majority of second-to-die or survivorship policies that are being sold are the guaranteed variety," says Israel of AIG. For some time, second to die "was more of a cash accumulation vehicle, but now we're seeing a move away from any type of accumulation sale and more toward the straight guarantees without much concern for the cash values." AIG has several survivorship products that offer a guarantee. The company's best-selling policy, Israel says, is Survivor Protector G. While he declined to provide specific sales figures for AIG's survivorship products, Israel did say that AIG's survivorship sales have gone up by double digits year over year "and have outpaced the industry by double."
But regulations percolating in some states could raise the cost of guaranteed second-to-die products, Israel warns. "There are several proposed regulations that would increase the amount of reserves that a company has to hold to guarantee a policy," he says. "That could affect dramatically the price of guaranteed survivorship universal life plans." Some states, as well as the National Association of Insurance Commissioners (NAIC), are now looking at a version of such a reg that was passed in New York.
