Second To Die Life Insurance Policy for Estate Planning

[On My Own]

I am interested in others views and experience with Second to Die Life Insurance as an estate planning tool with intent to pass a portion of ones estate tax free to their heirs. My financial adviser has recommended this with an expected IRR of 4.3% tax free into trust for our heirs if both of us die by age 98. Somewhat better IRR of 6.4% at ages 93. For reference, if heirs were taxed at 35% due to inherited $ on top of their incomes the tax equivalent IRR at ages 98 is expected to be 6.6%

I am struggling to find an independent perspective to evaluate the merits of this as an estate planning "alternative" investment.

Have others considered this ? And if so , how did you evaluate this against other investment alternatives?

 

[braumeister]

Thread moved to FIRE and Money forum for better visibility.

 

[SecondCor521]

My parents bought (or were sold) one in September 1997 when my Dad was 61 and my Mom was 58. It was purchased through a life insurance agent at a well-known and generally well-regarded insurance company.

My parent's opinion (which I think probably mirrored the agent's sales pitch) was that they were concerned about estate taxes, and they didn't want us children to have to sell assets to pay estate taxes because we might have to sell at a bad time.

My Mom passed away in 2016. My Dad is still alive and in average health at age 85.

The insurance agent originally said that the policy would probably be paid-up in about 10 to 12 years. I don't think it ended up being paid-up that quickly, and for whatever reason my parents decided to continue paying the premium anyway until last year. It does appear to be paid up now in year 24/25.

As an investment, it seems to have approximately returned about as well as a bond fund - about 4% a year. Which is fine with my Dad.

Based on how the life insurance policies worked when my Mom passed away, it does appear that it would function as intended - we got tax-free cash when she passed away that could be used for whatever, including estate taxes.

My parents did end up putting the second-to-die policy into an ILIT, which seems to be functioning as expected and is a helpful thing to do. Since the policy is not owned by the decedent, the proceeds are not counted towards the estate value. There is some paperwork to set one up and transfer the policies, and then annually my parents gifted to the ILIT the premium, and my sister the trustee sent out Crummey letters, but all in all not too much hassle.

The possibility of estate taxes being incurred has varied over the past 25 years as the limits have changed and my parents' assets have changed With better planning I think they could have probably been completely avoided - we did not elect DSUEA when my Mom died, which it seems now would have been helpful. As it is, it's something to manage but the amount of estate tax due will very likely not approach the amount of life insurance in place.

After watching the policy underperform the insurance representatives projections over the past 25 years, and watching the performance of the stock market over those same 25 years, and watching the estate tax limits get raised over a similar period of time, I personally think that my kids will end up better off if I do not purchase any whole life insurance. When I die, if my estate owes taxes, they can just sell something to pay the taxes. Even if the market is in a temporary funk at that point, I still think they'll be better off. So I own zero life insurance at this point.

I would add, though, that if your AA includes a sizeable portion of bonds, you could consider the second-to-die policy as a bond equivalent. In that way of looking at things, setting up an ILIT with a second-to-die policy (or any whole life policy) seems like a tax efficient way to move money out of your estate.

 

[OldShooter]

Be sure to understand the points where the federal estate tax begins (a little over $10M IIRC) and your state estate tax, if any, begins. If you are anywhere near that federal limit, you need expert advice; a cpa and an estate planning attorney, not an insurance salesman.

(Federal limit is scheduled to come down to around $6M in 2025, but that will almost certainly change in some direction. You'll probably have other reasons to re-look your estate plan by then anyway.)

Life insurance is a legit planning tool for people with large estates, especially illiquid estates like family farms or significant businesses. For most of us, the main benefit accrues to the salesperson. Will he/she personally guarantee the IRR number?

 

[SecondCor521]

One other thing to mention. When my Mom passed away and we went to collect on her life insurance policies, I do remember the insurance companies offering to keep the proceeds for us and put them into a savings account with them, or an annuity, and maybe a few other options. The impression I got was that they would rather we let them hold on to the funds instead of paying out the death benefits. We declined their offers.

I had originally thought they would just mail a check, but after thinking about it for about two seconds, I understood why they made those offers. Unexpected, and not a big hurdle for us, but something perhaps to consider counseling your prospective heirs about how to handle.

 

[RunningBum]

My parents bought one a few years ago, and a couple years in asked if we kids would take over ownership and payments. Otherwise they were going to let it lapse. I asked here for advice, thread is at https://www.early-retirement.org/forums/f28/survivorship-life-insurance-80392.html.

We decided to continue payments. Given that there had already been 2 payments made, I calculated that at a 5% return, the breakeven point was Dad at 98 or Mom at 96. At the time both were in good health but not so anymore at 87/85. Anyway, look at joint life expectancy tables and consider your own health.

 

[pb4uski]

One other thing to mention. When my Mom passed away and we went to collect on her life insurance policies, I do remember the insurance companies offering to keep the proceeds for us and put them into a savings account with them, or an annuity, and maybe a few other options. The impression I got was that they would rather we let them hold on to the funds instead of paying out the death benefits. We declined their offers.

I had originally thought they would just mail a check, but after thinking about it for about two seconds, I understood why they made those offers. Unexpected, and not a big hurdle for us, but something perhaps to consider counseling your prospective heirs about how to handle.

Many insurers started doing this in the late 80s as I recall.... rather than issue a check to the beneficiary they would keep the funds on deposit and mail the beneficiary a checkbook that the beneficiary could then use to pay expenses or whatever. Of course, the beneficiary could write a single check for the total death benefit and deposit the check to their own checking account.

The rationale was that many beneficiaries are under stress and a bit discombobulated so the death benefit would earn interest rather than be an uncashed check sitting on a desk or in a drawer... and there was a bit of merit to that rationale. Of course, the fact that we retained the money for a while was icing on the cake.

 

[pb4uski]

...Life insurance is a legit planning tool for people with large estates, especially illiquid estates like family farms or significant businesses. For most of us, the main benefit accrues to the salesperson. Will he/she personally guarantee the IRR number?

+1 There are some situations where whole life or sedond-to-die are legit estate planning tools.

On the last part, you can ask for an illustration based on the minimum guarantees, which will be much less optimistic than the other illustration based on expected, but not guaranteed, results.

 

[On My Own]

Appreciate all of the feedback

 

[Stormy Kromer]

DW and I have one. We have paid in $120,000 in premium and it has a cash value of $422,000 after 20 years. Death benefit of $450,000 on top of cash value.

It has performed well and the cost of insurance is small and we stopped paying premiums 6 years ago.

The mortality charge starts to increase exponentially in a few years and we will either lower the death benefit to the bare minimum, start cashing it in or 1035 to something else. You have to die young to come out ahead of the increasing mortality charges or the whole thing will collapse when you need it most.

If I had it over I wouldn't do it. I'd stick the premium in my a vanguard index fund and watch it grow then start gifting it to the kids when I got older to get it under the estate tax limit.

 

[SecondCor521]

DW and I have one. We have paid in $120,000 in premium and it has a cash value of $422,000 after 20 years. Death benefit of $450,000 on top of cash value.

Emphasis added. Why did you write "on top of"?

My understanding on all life insurance policies, including these, is that the beneficiaries receive the death benefit when you die ($450K in your example) and the cash value goes away ($422K in your example).

I hope you don't think that your beneficiaries will get $872K when the second of you die. Or if they do, then I seriously misunderstand life insurance.

 

[Stormy Kromer]

Emphasis added. Why did you write "on top of"?

My understanding on all life insurance policies, including these, is that the beneficiaries receive the death benefit when you die ($450K in your example) and the cash value goes away ($422K in your example).

I hope you don't think that your beneficiaries will get $872K when the second of you die. Or if they do, then I seriously misunderstand life insurance.

You made me look. Here is what today's statement says.

Accumulated Value $439,955
Surrender Value $439,955
Death Benefit $864,955

I was mistaken on the Death Benefit, it is $435,000 not $450,000.

So at the demise of the second of us the beneficiaries receive $864,955.

This is a VUL where the excess premium has been invested 100% in equity funds, 75% US 25% Int'l. Most years it matches it's benchmarks, less the mortality charge which is still under $2,000 a year. It doesn't kick off any taxable dividends and would be very efficient to leave to heirs.

Trouble with it is the mortality charge goes up each year starting at age 65 and you need to leave most of the Accumulated value in to make sure it stays funded. I don't plan on ever touching the Accumulated Value and knew that going it.

These policies tend to be sold touting its tax advantages. With today's capital gains rates that advantage is small or non-existent. IVUL's turn LTG into Ordinary Income.

This policy could pay off well to our heirs if we die in time. If I had it over again I would simply invest in index funds and watch it grow then give it away while I'm alive.