Survivorship Life Insurance

[RunningBum]

Is anyone familiar with this? It's a life insurance policy that pays off when both people die, which makes it an estate planning tool.

My parents bought one for them a couple years ago, at age 79/77. The annual non-variable premium is about $5800/yr, with a death benefit of $155,000.

They are nowhere near the tax exempt limit for estates, and I don't see any possible way they will be. They just found that they were spending less than their MRD and decided this was a better way to leave us (their kids) some money than just investing it. It would also leave us something if they go through their money and go on medicaid.

Now they're having second thoughts with the third payment coming due fairly soon. I don't want to get into why, so that it doesn't derail the topic. We can pick up the payments to keep the policy going, otherwise they may just let it lapse. The surrender value is more than the cash value right now.

From what I see, a 5% after tax return on $5800 annually gets over $155K in the 17th year. They are 81/79 now. A mortality table I found puts them at 14.6 years jointly. They are in good health now but both have factors that would probably put them at a little under average expectancy. My dad has a 90 year old brother and an uncle who made 88, but otherwise they were mostly in the 70s. My mom has already outlived her parents.

It seems that looking at this from an investment view, especially from this point forward (the previous 2 payments are a sunk cost), it is a decent investment, better than I would expect from life insurance. A 10% return would still take 13 years. A 3% return would take 20 years.

Is anyone else familiar with this type of policy? Any comments? I don't have direct access to the policy but my brother does, and he is in contact with the agent, who is actually a family friend. Of course he is making a commission, and perhaps they should not have gotten it in the first place, but our decision point is now with the 3rd payment coming up, which does change the picture somewhat. All of us are leaning toward continuing the policy, but if anyone wants out the rest of us would pick up their share and we'd just split it according to who is paying.

 

[Hermit]

Mortality for two combined is higher than for the two individually. Are you looking at that number?

Do you really want to bet against your parents long life?

 

[RunningBum]

Mortality for two combined is higher than for the two individually. Are you looking at that number?

Do you really want to bet against your parents long life?

Yes, I am looking at a joint life expectancy table.

As far as the bet goes, my parents already placed the bet on our behalf, and seem to prefer that we keep it going, though they said it's up to us. I would not have initiated the policy myself, mostly for the reason of not wanting to bet on their life, but now it is a financial investment decision.

 

[Bestwifeever]

Since your parents seem to want you to, I would keep up the payments--it seems worse case (rather, best case--they lead very long and healthy lives!) it's a wash financially? And perhaps they would feel foolish/embarrassed to have started the policy if you kids decide it's not worth continuing, and you probably don't want that.

 

[Independent]

I don't know what this means

The surrender value is more than the cash value right now.

In my world surrender value = cash value by definition.

Some policies have an "account value" and the surrender value is the account value minus a surrender charge.

At any rate, when you do the financial analysis for the "drop policy" option, you need to include the current surrender value of the policy not just the future premiums.

 

[RunningBum]

Since your parents seem to want you to, I would keep up the payments--it seems worse case (rather, best case--they lead very long and healthy lives!) it's a wash financially? And perhaps they would feel foolish/embarrassed to have started the policy if you kids decide it's not worth continuing, and you probably don't want that.

That's a good point. Thanks.

 

[samclem]

How does the insurance company make money on these policies? They sure aren't invested in anything making 5%, and they have a good insight into the mortality of their clients. Is it just through the lapse rates?

Since you asked, IMO having an "interest" in the earlier demise of the last surviving aging parent isn't a great position to be in. You and your siblings may have all kinds of challenges in caring for/making decisions on the medical care of your folks, and those discussions are an emotional minefield even without any financial interests at stake. If some of you decide to opt out, will Mom and Dad choose to modify their will so that things "even out"? If a sibling can't afford to pitch in anymore after 10 years, and Mom and Dad die in year 12, do they get anything? If Mom and Dad run through their money (in LTC, etc), will they preferentially ask those who are paying into this policy for an advance on the payout? Would the other siblings expect that? I think it is just cleaner and far simpler to drop the policy and let your folks know you want them to live a long time, be happy, and spend all their money on themselves. The relative size of the difference between leaving the money in their investments and doing this insurance thing wouldn't be worth the trouble and potential "issues." But that's just my opinion.

 

[RunningBum]

I don't know what this means

In my world surrender value = cash value by definition.

Some policies have an "account value" and the surrender value is the account value minus a surrender charge.

At any rate, when you do the financial analysis for the "drop policy" option, you need to include the current surrender value of the policy not just the future premiums.

I used the wrong term. My brother said the surrender charge is more than the current cash value, so none of the two premium payments already paid would be recovered if the policy were allowed to lapse now.

I don't think I was including future premiums in any drop policy considerations. What I was looking at is one of two options:

1) Make the yearly $5800 payment, and collect the insurance proceeds after they both die.

or

2) Let the policy lapse, and look at how $5800 invested annually would grow at various rates, to compare when it would be worth more than the insurance proceeds against their expected mortality.

I suppose there is a 3rd option to continue paying the yearly premium for awhile but at some point looking to drop the policy and take the cash value. I have doubts about that working out to advantage. We'd have to have everyone on the same page with that too. Right now we seem to all be on the same page with #1, and I don't want to muddy the waters with another option, which we could always consider later anyway if we keep the policy in force.

 

[Sunset]

How solvent, well rated is the insurance company, will they be able to pay in approx 14 yrs ?

I'm not sure it's such a good bet, as not counting taxes a 5.6% return would amount to $155K in 14.6 years without considering the sunk cost. If you consider the sunk cost then the rate is approx 4.8%.

Since you are considering continuing the policy I didn't consider the sunk cost.
So comparing this to your parents putting the money into BRK.B - they would pay no tax, and when they die, the basis is reset so you pay no taxes.

My guess is that over the next 14.6 years, BRK.B will rise more than an avg of 5.6%/yr.

Another way to look at it, is would you buy this policy on my cousin's parents, if not then its probably not a good investment.

 

[RunningBum]

How does the insurance company make money on these policies? They sure aren't invested in anything making 5%, and they have a good insight into the mortality of their clients. Is it just through the lapse rates?

Since you asked, IMO having an "interest" in the earlier demise of the last surviving aging parent isn't a great position to be in. You and your siblings may have all kinds of challenges in caring for/making decisions on the medical care of your folks, and those discussions are an emotional minefield even without any financial interests at stake. If some of you decide to opt out, will Mom and Dad choose to modify their will so that things "even out"? If a sibling can't afford to pitch in anymore after 10 years, and Mom and Dad die in year 12, do they get anything? If Mom and Dad run through their money (in LTC, etc), will they preferentially ask those who are paying into this policy for an advance on the payout? Would the other siblings expect that? I think it is just cleaner and far simpler to drop the policy and let your folks know you want them to live a long time, be happy, and spend all their money on themselves. The relative size of the difference between leaving the money in their investments and doing this insurance thing wouldn't be worth the trouble and potential "issues." But that's just my opinion.

I don't know how the insurance company is making money, but I'm pretty confident in my calculations. Remember, I'm only considering from here forward. They've already put 2x$5800 in.

The other ones are good points, but most of those remain with or without the policy. Financially, we are best off if they went tomorrow, and didn't spend down any more of their IRA. I hear what you are saying about the complications, but like bestwifeever suggested, there may be hard feelings if we drop it.

There's already a certain amount of uneven gifting and loans that I don't think have been repaid, and I'm on the short end of it. They said they'd make it right in their will, but I told them I don't care since I need it the least. I truthfully don't know how it stands now, and still don't care, even if I get nothing. I've also figured if they really got into a jam that I'd be the one to help them out. Unfair? That's my call to make, not anyone else. Besides, 3 of my siblings live in town and are dealing with them on a weekly basis with driving them places and doing things for them that I can only do on my one or two trips there a year.

Accounting for someone who can no longer pay is a good point. I'm going to suggest that the rest of us make their payment as a loan taken out against the final proceeds.

Thanks for the comments.

 

[samclem]

I hear what you are saying about the complications, but like bestwifeever suggested, there may be hard feelings if we drop it.

Maybe, but looking at it another way, it shouldn't ruffle any feathers. After all, you are just agreeing with them: It's not a good use of the money.

Anyway, I hope it works out for all of you.

 

[RunningBum]

How solvent, well rated is the insurance company, will they be able to pay in approx 14 yrs ?

I'm not sure it's such a good bet, as not counting taxes a 5.6% return would amount to $155K in 14.6 years without considering the sunk cost. If you consider the sunk cost then the rate is approx 4.8%.

Since you are considering continuing the policy I didn't consider the sunk cost.
So comparing this to your parents putting the money into BRK.B - they would pay no tax, and when they die, the basis is reset so you pay no taxes.

My guess is that over the next 14.6 years, BRK.B will rise more than an avg of 5.6%/yr.

Another way to look at it, is would you buy this policy on my cousin's parents, if not then its probably not a good investment.

I don't know who the insurer is, but I do need to find out.

Assuming the insurer is highly rated, I think the insurance is a less risky investment than BRK.B will be. If I was to include the insurance in my AA, it would be a non-equity, so I feel like I would compare it to bonds. Does that seem right?

If I had the opportunity to take this on someone else's parents, strictly as an investment, Yes, from what I am seeing I would continue the policy.

 

[RunningBum]

Maybe, but looking at it another way, it shouldn't ruffle any feathers.

It probably wouldn't ruffle feathers, really. They've basically said they're fine with whatever we choose to do. Sometimes there's an underlying current beneath that though, but I'm not too worried about that.

After all, you are just agreeing with them: It's not a good use of the money.

I'm not sure what you meant by the bolded part. Why isn't it a good use of the money, and where did we agree to that? I think I'm missing something here, and wondering what it is.

Anyway, I hope it works out for all of you.

Thanks

 

[samclem]

I'm not sure what you meant by the bolded part. Why isn't it a good use of the money, and where did we agree to that? I think I'm missing something here, and wondering what it is

I'm just saying that your parents have apparently decided to let the policy lapse (I assumed it was because they have a better use for the premium dollars) and if you and your siblings also made the same decision that it would just show that you agree with the logic used by your parents to come to the same decision. I'm the one who probably read too much into what was written.

 

[pb4uski]

..... Is anyone else familiar with this type of policy? ....

Yes... it is also referred to as "second to die" since it pays on the second death. Commonly used for estate planning.

While it is a bit morbid to bet on your parents life... it could be a good investment. If you assume that the second to die is the younger of the two and she lives to be 90, that is 11 years... and the rate of return on an annual payment of $5,800 a year for 11 years and then receiving $155,000 (which would be tax free) is 17% after-tax by my calculations.

 

[Sunset]

Since you haven't seen the policy, couldn't your sibling take pictures of it, and send them to you ?

What would in my mind kill this idea, is if the insurance company has any way to increase the premium.

 

[RunningBum]

I'm just saying that your parents have apparently decided to let the policy lapse (I assumed it was because they have a better use for the premium dollars) and if you and your siblings also made the same decision that it would just show that you agree with the logic used by your parents to come to the same decision. I'm the one who probably read too much into what was written.

Ah, I see. I'd have to delve into my Dad's logic these days to better explain, which I don't want to do. He still thinks it's a good policy, but doesn't think he can afford to pay for it anymore. I didn't make that very clear, but I thought I did say that my siblings and I are all either for or leaning towards keeping the policy.

 

[Independent]

I used the wrong term. My brother said the surrender charge is more than the current cash value, so none of the two premium payments already paid would be recovered if the policy were allowed to lapse now.

I don't think I was including future premiums in any drop policy considerations. What I was looking at is one of two options:

1) Make the yearly $5800 payment, and collect the insurance proceeds after they both die.

or

2) Let the policy lapse, and look at how $5800 invested annually would grow at various rates, to compare when it would be worth more than the insurance proceeds against their expected mortality.

I suppose there is a 3rd option to continue paying the yearly premium for awhile but at some point looking to drop the policy and take the cash value. I have doubts about that working out to advantage. We'd have to have everyone on the same page with that too. Right now we seem to all be on the same page with #1, and I don't want to muddy the waters with another option, which we could always consider later anyway if we keep the policy in force.

Okay, that makes more sense.

I meant that in your (2), if there had been a surrender value, you'd want to include that as some of the invested money that would grow if you surrendered the policy.

 

[Golden sunsets]

Running Bum; We have a second to die policy. It was recommended by our estate attorney and was purchased in 2000. Our premium is almost identical to your parents. At the time that we purchased it out State estate taxes were triggered at $1,000,000. The State that I live in now mirrors the federal exclusion rate of $5.4MM. Now that we are fifteen years into it there are no more surrender charges and annual fees are low. The face value of our policy is $500,000 and the investment value is somewhere around $110,000, so the payout as of now assuming death of both would be $610,000. If we cashed out we'd just get the $110,000. I have wondered if we should continue this policy. Our estate attorney is neutral on it. The cost of insurance part of the $5,800 right now is still nominal as we are still in our 60's. As we age though the cost of insurance will take a bigger part of the annual premium. Alternately we could stop making premium payments at this point and allow the cost of insurance to be taken from the investments. We may do this. I think there is a no lapse guarantee if we do this.