Week of February 27, 2011

Second-to-Die Insurance for Seniors By Michael Ettinger, Esq. Also known as "survivorship life", second-to-die insurance is just what it says: a policy on the lives of both husband and wife that only pays out when the second of them dies. Since the insurance company does not have to pay until the expiration of two lives, instead of one, the premium is significantly lower. Further, even if one spouse is not in the best of health, the insurance is still made available due to the better health of the other spouse. Survivorship life has traditionally been used to create wealth when it is needed. For example, since estate taxes are generally due on the death of the surviving spouse, the policies are often used as a cost effective way of paying that tax. Care must be taken not to make husband or wife owners of the policy, however, since their estate would end up paying tax on the insurance policy they bought to pay the tax! To avoid that problem, these policies are owned either by the adult children, with the parents gifting the premiums to them annually or, where there are issues with the children owning the policy, the policy may be owned by a trust, known as an Irrevocable Life Insurance Trust, or ILIT. These policies are also commonly used in situations where the couple has a disabled child or grandchild. Here, the idea would be to create a pool of money to address the child’s ongoing care needs after the last parent dies. The beneficiary of the policy, in this case, would be the Special Needs Trust established by the parent or grandparent for the disabled child. With interest rates at historic lows, a third use for second-to-die insurance has arisen. That is as a wealth investment vehicle. For older couples who have some savings that they are not spending, and reasonably know they will have no need of spending, there are better things to do than let the bank use your money and pay you little or no interest. For example, here is a chart of what $100,000 would buy from a highly rated insurer with husband standard risk and wife preferred: Consider whether leaving the money in the bank would ever yield returns like these. Keep in mind as well that the $100,000 sitting in your bank account is an available resource to be "spent down" if you should ever have to go into a nursing home and that the money may be exposed to estate taxes as high as 55%. The insurance monies, however, can be protected from both of these gremlins. Let’s look at another option. Say a couple, both aged 70, rated standard plus, wanted to take out a $500,000 second-to-die policy and pay annually. The premium would be $10,751 per year. Here are the numbers if the couple lives to ages 85, 90 and 95. Even if that couple or one of them lived to age 95, it would still turn out to be a 4.49% return on their investment. These rates are simply unavailable elsewhere today. Based on the above, senior second-to-die insurance, for use as an investment, may be an idea whose time has come. Subscribe to receive weekly blog posting on estate planning issues -- New York Estate Planning Lawyer blog. Subscribe to receive weekly blog posting on elder law issues -- New York Elder Law Attorney blog.