For estate planning purposes, my wife and I have applied for a second-to-die term insurance policy. When I was in the life insurance industry in the 1970’s, my company did not offer this product so my knowledge of its pricing is unknown. Although the markets for this type of insurance are a bit different in the US and Canada, the actuarial considerations should presumably be the same.
My question is: do actuaries price for a higher mortality rate on the second person to die because of the relationship of the two people covered? Or do actuaries price the coverage just based on the two lives as if they were totally independent? There would be a higher (but still small) probability of the couple dying together in a crash or contracting the same fatal disease from each other. There is also the emotional loss of losing one’s partner which sometimes lead to an earlier than expected death. How much, if at all, are these factors reflected in the pricing.
I am not looking for trade secrets so please don’t mention any specific companies. This question is merely one of actuarial curiosity! Thanks.
Second to die term?
Or second to die ul with t100 coi?
Sorry, I can’t comprehensively answer the question.I know they use an equivalent single age for the two insurer but haven’t seen the calcs for esa in 25 years lol.
Also curious about the answer. My guess is, they assume independence but that’s a guess.
Thanks. If they don’t price in the potential added mortality on the second to die after first death occurs, than I suppose I might be getting a bit of a bargain!
We believe we are good health risks so we passed on the ul/term to 100 coverage as there was a chance we would end up paying more than the coverage amount. Our main concern is premature death in the next ten years because of the resulting tax liability for the kids. That 10 year coverage was reasonably priced in my opinion given that my wife and I are both over 70.
That’s the first time I’ve seen someone do that.
I suggest that you consider what happens at the end of 10 years if you have insurability concerns. You won’t want the the term 10 to expire. And youll be past conversion age.
Thus you might consider a policy that you can really reasonably keep for life if you change your mind - a backup plan.
That would suggest empire life or wawanesa. Both have term 10 that becomes t100 eventually, if you decide to keep it.
Empire has jltd term 10. Wawa will have cheaper rates I expect but not sure if they have a more term 10.
Thanks. We don’t care about whether we are able to renew it after 10 years as the insurance is not really needed after 10 years. Happy to just pay the premiums for 10 years for peace of mind for that period.
It’s been years since I’ve priced a 2nd-to-die policy, but the “heartbreak” factor is real. The lives are not independent and we did not price the product as if they were. It’s been too long, I can’t give you a sense of the load.
Based on my limited knowledge of the US market for this type of product, it doesn’t exist in term form. There’s a cash value component. Although, that’s only my based on my limited experience. Others might know otherwise. It typically fills a liquidity need created by estate taxes. With the current estate tax kicking in around $5.5M for an individual and $11.0M for a married couple, it’s really only finds a place in the high end market. There is very little demand for the product in the US.
Thanks. The second-to-die policies in Canada can protect you from the tax you pay on your RRSP. An RRSP is like an IRA but with higher contribution limits so it is not unusual for them to accumulate to $1million+ if they are your main retirement savings vehicle.
Most of an RRSP would be taxed at 50%+ in the year of death so the income tax takes a big piece out of one’s estate. There would also be capital gains taxes on other investments that have appreciated in value. No estate tax in Canada though: just a low fee if the estate has to be probated.
My broker said that most second-to-die policies are UL; term insurance policies like mine are only offered by one firm that he had access to.
Consumers have no idea on what goes on with life insurance. IMO that’s because most financial planners are focused on sales of investment products and don’t get into the intricacies of life insurance. They just ignore it beyond the odd term or UL sale.
JLTD though IMO is commonplace whenever estate planning comes up - it’d be the first place many brokers would go to.
The real ‘unknown’ policy IMO is the insured retirement plan using UL. That’s sold inappropriately by a few Canadian agencies, but there’s a ton of Canadians who should be using that. I had one business owner respond ‘if this is so great, why have I never heard of it?’. Well, again, because your financial guy doesn’t really do life insurance and doesn’t know anything beyond term and UL.
I have some familiarity with RRSP and RRIFs. I didn’t realize the balances were taxed at 50+% at death. At least those balances are fairly liquid assets. In this situation, it seems like buying insurance is just a true bet against the insurance company on your mortality.
And it sounds like there is no “step-up” on capital gains at death (i.e. the capital gains are wiped out and the beneficiary inherits assets with a basis determined on the day of death). I know that idea gets kicked around in the US every time they’re looking for additional tax revenue, but that hasn’t happened yet.
I would clarify that the top tax rate of 52.5% kicks in at $227K in taxable income so it is only the RRSP or RRIF proceeds above that level that get hit with that high a rate. Below that it probably averages out to about 35%. However if you had built up an RRIF of $1 million that results in a lot of tax in the year of second death compared to what you would pay if you were drawing it down at $50,000 per annum.
Capital gains are taxed at 50% of the regular income tax rate but tax is paid upon death.