Life insurance planning under GRRR
July 18, 2002 (original: June 23, 2001)
The Economic Growth and Tax Relief Reconciliation Act of 2001 (GRRR) became law in June 2001. Financial columnist Jane Bryant Quinn got it just right: "a contemptible piece of consumer fraud," she wrote in the June 11, 2001 issue of Newsweek. The National Underwriter, a trade publication, was equally blunt in its June 11, 2001 editorial, entitled "Congress Should Be Ashamed Of This Dishonest 'Repeal'":
"Of all the legislation National Underwriter has covered over the years, we would be hard pressed to identify anything that is as intellectually dishonest as the so-called 'repeal' of the estate tax...
Who knows what Congress will do if and when it decides to reexamine the estate tax? How can anyone develop an effective estate plan amid so much uncertainty?
And that is the real tragedy of what Congress did. The very nature of estate planning is long-term. Decisions made today will not have an impact until 10, 15, 20 years or more into the future. Some measure of predictability is vital to long-term estate planning.
Moreover, members of Congress know this. These are not babes-in-the-woods. Most are very successful lawyers or business owners that have more than a rudimentary understanding of these concerns.
They simply betrayed their constituents by taking a dishonest, short-term view of a long-term issue."
It is hard to imagine a more inane way of writing tax laws. Many of the tax law changes won’t take effect for years, and all of the changes expire in 2011, so you can’t do financial planning without considering what the politicians might do in the years to come. Will they extend some of the tax breaks and let others lapse? Will they tinker with the tax code in other ways as they try to fix what they did in 2001?
What a mess. But you can’t put your life on hold for a decade; you have to make plans even when lawmakers deliberately create obstacles to planning. So, what life insurance strategies make the most sense while we’re forced to live under GRRR?
Clearly, flexibility is more important than ever. You don’t want to make commitments that would be expensive to break. With that in mind, here are a few ideas to consider:
Buy convertible term. Term insurance is easy to understand and easy to compare. Even at older issue ages, you can get affordable rates that are guaranteed for 10 years. And convertible term lets you keep your options open, because the convertibility provision gives you the right to buy a cash value policy without taking a new medical exam. If you later decide that you want a cash value policy rather than term, you can shop around if you’re still in good health, or you can convert if you’re not. This strategy may work best with low-load term policies that are convertible to low-load cash value policies, although it makes sense to look at agent-sold policies as well as the low-loads. As you examine your choices, pay particular attention to the trade-offs between the cost of the term insurance and the quality of the convertibility provision. Low-load term policies issued by Ameritas (www.ameritasdirect.com) and TIAA-CREF (www.tiaa-cref.org; also see www.glenndaily.com/tiaacref1.htm) are a good place to start, and you can get quotes for both low-load and agent-sold term policies at www.term4sale.com.
Example: A 60-year-old man in average health wants $1 million of life insurance while he waits to see what taxes might be due at his death. The guaranteed annual premium for one company’s 10-year level-premium policy would be $5,370, and it would be convertible to a low-load cash value policy for 10 years. To be prudent, he plans to set aside another $35,000 each year, so that he’ll be able to afford a cash value policy later if he wishes.
Buy low-load cash value policies. Low-load policies have high immediate cash values, because they are not burdened with the high commissions and other selling expenses of traditional agent-sold policies. This makes them particularly suitable when flexibility is a key consideration in setting up a life insurance program. There are two strategies that you can use with low-load universal life and variable universal life policies: (1) you can pay a premium that is designed to keep the policy in force for life; or (2) you can pay a low premium that is designed to keep the policy in force for a short period, such as 10 years, with the option to put more money into the policy to extend its life. This second strategy is especially effective with low-load second-to-die policies, because you can simulate second-to-die term insurance while retaining the advantages of a cash value policy.
Example: A 60-year-old couple in average health wants $1 million of second-to-die life insurance. By paying an annual premium of only $2,500 they can probably keep one company’s low-load second-to-die variable universal life policy in force for over 10 years, and they’ll get some money back if they decide to drop the policy along the way. They can extend the coverage by paying a higher premium; for example, a $25,000 annual premium would keep the policy in force for life under conservative assumptions, and the first-year cash surrender value would almost equal the premium.
You can find a list of low-load cash value policies at www.glenndaily.com/documents/liss-sup.pdf.
Warning: Some companies are creating high-commission agent-sold policies that offer various money-back guarantees, but these do not provide the flexibility of a low-load policy. For example, one company guarantees that the cash value will be equal to the premiums paid after 10 or 15 years. In contrast, a low-load policy can give you the peace of mind of a high cash value from the first day. The table below compares low-load policies and the estate-tax-related benefits in agent-sold policies.
|Low-load policies (see list)||High immediate cash surrender values, with no string attached|
|Clarica||Surrender value equals total premiums after 10 or 15 years|
|Columbus life||Additional surrender or exchange options if estate tax is permanently repealed|
|Hartford||Waiver of surrender charge in 2010 if estate tax repeal extends beyond 12/31/10.|
|Pacific Life||Premium refund rider: Premium refund (subject to payment of minimum premiums) if estate tax is repealed within 10 years; surrender value equals total premiums after 10 years. Estate tax waiver of surrender charge rider: Waives surrender charge if policy is surrendered within 60 days of complete repeal of estate tax by 12/31/2010.|
|Principal||Waiver of surrender charge and recovery of some policy charges if estate tax repeal is enacted by 12/31/01. Expires 12/31/01.|
|Transamerica||Waiver of surrender charge in 2010 if estate tax repeal extends beyond 12/31/10.|