Second-to-die policies kicking the bucket
By Rod Gibson • Bankrate.com

Second-to-die insurance is a tool only the wealthy can use effectively and now even many millionaires are turning their backs on it.

Also known as survivorship insurance, wealthy parents traditionally used the policies to help their kids pay off hefty estate taxes after they both died. That was a good deal, particularly for the beneficiaries. But its popularity waned with changes in marriage values as well as changes in estate tax law.

Federal estate tax exemptions increase each year until 2009, when $3.5 million will be exempt. Then estate taxes are scheduled to be repealed altogether in 2010, but will reappear in 2011, with only the first $1 million exempt from federal estate tax.

"People are cautious about it because the estate tax law has changed so much," says Howard Drescher, of the Life Insurance Marketing Research Association in Windsor, Conn.

Second-to-die insurance dropped a whopping 25 percent in 2001 and another 5 percent the next year, before leveling off in 2003.

How it works
Nothing is paid until both of the insured, usually parents, die. Say the husband dies first. His estate passes to his wife without estate taxes because she is the spouse. However, when she dies, Uncle Sam is not as generous with the other beneficiaries. The taxes on her estate could be as high as 48 percent (in 2004), and even more if she skips a generation, leaving everything to the grandchildren.

That's when the second-to-die insurance comes in handy.

Often, parents leave an estate that is not liquid. A good portion of it might be in real estate or in a business venture, leaving the beneficiaries without the cash needed to pay the tax and, all too often, forcing them to sell off some or all of the estate's assets.

Second-to-die policies provide that cash. Historically, the estate tax is one of the key reasons that 70 percent of family-owned businesses don't make it to the second generation.

But a big negative looming over survivorship insurance, particularly for a couple with an estate worth $1 million to $3 million, is the major uncertainty over the future of the estate tax.

The exemption jumped from $1 million for 2002 and 2003 to $1.5 million for 2004 and 2005. For the next three years -- 2006, 2007 and 2008 -- it rises to $2 million, and in 2009 reaches $3.5 million.

Trying to guess what the estate tax will be beyond a few years involves all the certainty of a crap shoot. "Many people are deciding to take their chances that it will be repealed," says Harold Skipper, head of the risk management and insurance department at Georgia State University.

David Woods, president of the Life and Health Insurance Foundation for Education, says, "It probably would be better to look into a crystal ball than try to project what the estate tax is going to be like in four or five years. When you consider the national deficit, I think there is little chance that the estate tax will be (permanently) repealed, as some have predicted."

High rollers only
There's not much sense in buying second-to-die insurance unless your estate is in the $3-million-or-above range, and by 2009, you'd have to be worth about $7 million to have it make sense.

And today there are better ways to get around it.

Rodney Loesch, president of Loesch & Associates of Moberly, Mo., says a couple with a $5 million estate might consider buying about $1 million in second-to-die insurance. If husband and wife were both about 60 and both in good health, that policy would run about $9,000 a year or perhaps $20,000 a year with a five-year payoff. It is traditionally whole-life or universal-life insurance held in an irrevocable insurance trust.

Because second-to-die insurance is one policy for two people, it's generally cheaper than two individual policies. Also, as long as one of the two is in good health, the spouse with questionable health can be included even though it would be difficult for that person to get a policy on his or her own.

"They are cheaper because they are insuring the second person to die, not the first," says certified financial planner Glenn Kautt, president of the Monitor Group in Fairfax, Va.

Till debt do you part
"The big problem is that our world is no longer an irrevocable one," says Loesch. "There are all sorts of things that can muddy the water in a second-to-die policy, including divorce and remarriage."

The insurance is to protect the estate, which should remain pretty constant, says Brian Bozajian, an independent agent in Manhattan Beach, Calif. He says divorce is not that common among his clients for this product, usually in their late 60s or older.

The blended families of modern society are not good candidates for this type of insurance either. There may be children from multiple marriages and the question quickly arises if they all would be considered equal on the inheritance scale, particularly if most of the money comes from just one side of the family.

Bozajian recalls the case of a couple who were 78 and 79 when they purchased second-to-die life insurance and the husband died at age 82. The wife remarried shortly after and let her new husband handle the couple's financial matters. He resented that they were spending some $26,000 a year for insurance for children that weren't his. Since the policy was part of an irrevocable insurance trust, he could not change beneficiaries. However, he could stop paying the premiums and allow the insurance to lapse, which is exactly what he did.

Consider another situation: Let's say Dad, 66, divorces Mom and remarries a trophy wife, who is somewhere between 28 and 34. This new couple would not be good candidates for a second-to-die policy because there would be no payout to cover the estate tax until the new wife dies. And she could stop paying hefty premiums for a policy that would only benefit kids who are not hers. In this case, Dad would have been better off buying a single term insurance policy just to pay off the estate taxes.

If you insist
Still think a second-to-die policy may be good for you? Fine, but don't buy it after consulting only with an agent. This should be part of a complete estate plan which usually would include a certified financial planner, an estate attorney and possibly the family accountant.

"Other tax provisions than the second-to-die insurance would be included," says Loesch. "And safeguards would be taken on the continuity of the insurance, before it is taken out, that would cover situations such as divorce, remarriage and blended families."

Even with this uncertainty, second-to-die insurance still can be a good buy if it is used for what it was designed to do: Provide money to pay off the estate taxes for a couple's children, says Paul Graham, chief actuary of the American Council of Life Insurers. "Even if you have just a $1 million tax burden and can pay it off for $100,000, why not do it?"

-- Posted: July 28, 2004