survivorship life insurance effectiveness at generating retirement income

survivorship life insurance effectiveness at generating retirement income Life Insurance: Is Not a Deposit of Any Bank Is Not FDIC Insured Is Not Insured by Any Federal Government Agency Is Not Guaranteed by Any Bank or Savings Association May Go Down in Value

Survivorship Life Insurance: Effectiveness at Generating Retirement Income Compared to Single Life Products Table of Contents Overview 1 Background 2 A Historical Perspective The Relationship between CVAT and Survivorship Designing Life Insurance for Accumulation 5 The Role of GPT and Option B in Accumulation 6 Survivorship vs. Single Life 8 Conclusion 10

overview Survivorship life insurance has been stereotyped as a protection product used primarily by wealthy married couples to help pay federal estate taxes. As a result, many carriers in designing these products have provided only the Cash Value Accumulation Test (CVAT) as the test to meet the definition of life insurance. This approach has limited the product s use in accumulation situations. However, the generally lower policy charges associated with survivorship products can make them effective accumulation vehicles when offered in conjunction with both the Guideline Premium Test (GPT) and CVAT, in addition to the life insurance protection they provide. This white paper will provide a brief historical background on how survivorship products have evolved, detail in general terms how a carrier can build a strong survivorship accumulation product, and highlight how a survivorship accumulation product can often outperform a single life product for couples where supplemental retirement income is a key goal. survivorship life insurance 1

background A Historical Perspective Survivorship life insurance has been a popular niche product since 1981 when the federal estate tax law was changed and the unlimited marital deduction was introduced. This revision in the law treated a husband and wife for the first time as one economic unit if property was transferred at death from one spouse to the other. Thus, if a wealthy spouse died and left a substantial estate to his/her surviving spouse, the federal estate tax was deferred at the first death since the economic unit continued to exist. But when the surviving spouse died, the entire remaining estate was taxed. After this revision, an insurance policy that insured two lives but paid a death benefit only at the survivor s death was very appealing. Survivorship life insurance has been the only life insurance policy where the timing of the death proceeds specifically matches the estate tax liability incurred by a married couple who utilize the unlimited marital deduction. The life insurance death benefit provides the cash needed to help pay federal estate taxes and other estate settlement expenses in a cost-efficient manner. As a result of its long history of success in meeting estate liquidity needs, survivorship life insurance has largely been viewed by both producers and insurers as a protection-focused product. 2 survivorship life insurance

The Relationship Between CVAT and Survivorship Since survivorship policies have been perceived primarily as protection-oriented, many insurance companies offered only the CVAT as the definition of life insurance on their survivorship products. This approach made it very difficult to use survivorship as an accumulation vehicle, as will be discussed later in this white paper, but it was beneficial to insurance companies for several reasons: GPT is generally best used when a policy is heavily funded and likely to reach corridor. Since most survivorship products were being designed for moderately funded protection with a specified face amount (the typical sale in estate planning situations), having GPT available seemed superfluous. Policies sold in this market were not likely to approach corridor so there would be no difference in result between GPT and CVAT in most instances. If the policy did reach corridor, CVAT seemed preferable because it requires much higher corridor factors than GPT, resulting in a greater death benefit if the policy went into corridor. A higher death benefit is more valuable than a higher cash value in estate liquidity sales. This is especially true when the policy is owned by an irrevocable life insurance trust, which is the typical ownership arrangement in estate planning scenarios. CVAT allowed for easier administration of a survivorship product (or a single life product) inasmuch as it does not have the administrative complexity that accompanies GPT with its guideline premium limitations and corresponding testing. definition of life insurance The Internal Revenue Code defines two tests that life insurance carriers can choose from in order to ensure the policies they issue are eligible for the favorable tax treatment that life insurance is generally afforded: The Cash Value Accumulation Test (CVAT) and The Guideline Premium Test (GPT) The intent of these tests is to determine if the policy being tested is actually a disguised investment instead of a product with the primary intention of providing a death benefit. Which test is best depends on a number of factors, including the internal pricing of the policy, the expected funding patterns and the overall objective that the policy is intended to serve. By not offering GPT as an option to meet the definition of life insurance, insurers saved money on administrative system costs and were able to introduce their new survivorship product with less developmental effort. survivorship life insurance 3

There are also additional complications with an accumulation focus for survivorship policies, because they are subject to special TAMRA rules with regard to a reduction in benefits. If there is a reduction in benefits at any time while a survivorship policy is in force (not just within a 7-Pay Period, as for single life policies), the 7-Pay Premium is recalculated based on the reduced benefits with a Modified Endowment Contract (MEC) possibly resulting. Some examples of policy changes that would be classified as a reduction in benefits under TAMRA include the following: a requested decrease in the base policy face amount; death benefit option changes from A (level) to B (variable) that cause a decrease in face amount; and face amount decreases caused by partial withdrawals. The possibility of losing the favorable tax advantages on distributions if a policy becomes a MEC unfortunately eliminates the use of survivorship as an accumulation and retirement income vehicle in the eyes of many financial professionals. Fortunately, careful planning can prevent a survivorship product from becoming a MEC due to a reduction in benefits. The more sophisticated MEC testing available today in many carriers illustration software for both new business and in-force policies can assist producers in identifying potential MEC scenarios and avoiding them. For these reasons, insurance carriers have not really focused on designing survivorship products for supplemental retirement income, nor have most financial professionals utilized them as such. However, over the past several years, several survivorship variable universal life products developed specifically for accumulation have been successful. More recently, survivorship indexed universal life accumulation products have been introduced and have also gained traction in the marketplace. 4 survivorship life insurance

designing life insurance for accumulation It is often more effective to design a life insurance product for a specific purpose either accumulation or protection than to develop one product that attempts to meet both of these goals. Survivorship accumulation products, which are intended to be heavily funded, will generally possess different design features than survivorship products designed for protection at a moderate cost. Insurance companies often tinker with three pricing levers when designing a new product: 1) Policy Charges specifically, cost of insurance and per $1,000 charges, 2) Premium Loads, and 3) Interest Crediting Rates and Cap Rates. Accumulation products tend to have low premium loads, and high charge rates at later durations, particularly cost of insurance charges. Accumulation products also have high crediting and cap rates to help facilitate cash value buildup. Protection products tend to have high premium loads, and low charge rates in later durations to help facilitate a low cost, death benefit-focused design. Protection products also tend to have low crediting and cap rates. For accumulation products, a low premium load allows premium to grow quickly and at as high a crediting rate as possible. Cost of insurance (COI) rates will often be higher in an accumulation product, at least at later durations, but these charges may not impact performance significantly provided that the policy has been heavily funded and has achieved decent performance. This would result in a net amount at risk in later policy years that can be very small. In addition, the per $1,000 charge rate may be slightly higher or charged for a longer duration with an accumulation product than with a protection product. However, accumulation sales are often structured for the client using a lower initial face amount (a minimum non-mec face amount) than protection sales, and therefore a lower total per $1,000 charge. Moreover, accumulation products tend to use segment bonuses, customer loyalty credits and/or persistency bonuses, all of which are designed to increase cash values. Protection-oriented products, on the other hand, often have lower COI rates at later policy durations since the net amount at risk may be quite large if the policy was moderately funded. survivorship life insurance 5

the role of GPT and Option B in accumulation In the life insurance accumulation strategy, policyowners are not only purchasing a death benefit for their families, but they are also trading income taxes for policy charges. In fact, they are betting that taxes will be greater than policy charges. For this reason, a goal of the insurance accumulation strategy is to reduce the drag from policy charges. Two of the key tools available in designing and illustrating a survivorship accumulation product are the definition of life insurance (GPT must be an available choice) and the death benefit options. When seeking to maximize retirement income with survivorship insurance, producers should generally elect GPT in the illustration system, use Death Benefit Option B initially, and solve for the minimum non-mec face amount. Later, the policy can be switched to Option A after premiums cease. Using Option B with GPT is beneficial to cash value accumulation, particularly when paying premiums for longer than 7 or 8 years, because it generally provides the policyowner with the lowest initial face amount that would not make the policy a Modified Endowment Contract. Lower face amount means lower policy charges. Here is a breakdown of why: The per $1,000 charge, which is generally based on the policy s initial face amount, is lower than with Option A. Using a minimum non-mec design with Option A would result in a higher face amount. COI charges are lower over the long-term because of the smaller initial face amount and the reduced net amount at risk. Note that when premiums will be paid for just 5-7 years, the general rule about using GPT with Option B mentioned above may not hold true and electing Option A with either CVAT or GPT should also be considered. Another advantage of GPT in accumulation strategies stems from the fact that its corridor factors are much lower than CVAT s even with single life products. This helps to minimize the death benefit and subsequently the cost of insurance charges if corridor is reached. CVAT is generally not very efficient in most accumulation scenarios since policies are very likely to reach corridor due to the heavy funding strategy. When it comes to single life vs. survivorship, the survivorship corridor factors for CVAT are much higher than the corresponding single life CVAT corridor factors. They are also based off both insureds ages. In contrast, a survivorship policy electing GPT uses the same corridor factors as for a single life product except that these factors are based on the younger attained age of the two insureds. As previously noted, using CVAT in survivorship accumulation strategies may make sense in limited circumstances, such as where the insureds want to pay substantial premiums over just 5-7 years. This is particularly the case if they want to start taking distributions from policy cash values immediately after premium payments stop so that the policy doesn t have time to reach corridor. 6 survivorship life insurance

Let s use a typical example to illustrate the difference in corridor factors between GPT and CVAT using AXA s BrightLife Grow Survivorship, an indexed universal life accumulation product. Assuming a male age 55 and a female age 50, the corridor factor in the first policy year with CVAT is 390.9% of the policy account value, compared to 185% for GPT. CVAT s higher corridor factor translates into a significantly greater death benefit over a policy s duration, perhaps twice as much for a substantial number of years, which leads to substantially higher COIs over time. These charges subsequently erode the cash value that is available to provide supplemental retirement income. Electing GPT has the added benefit in many cases of offering overloan protection, provided that certain requirements are met. This important feature in accumulation strategies may not be available with CVAT; or if it is available and the provision is ever exercised, the cost may be substantially more than with GPT because the residual death benefit must be much higher. survivorship life insurance 7

survivorship vs. single life Survivorship products have an important advantage compared to single life products in building cash value. The COI charges can often be quite low in early policy years, even for a $1,000,000 face amount, if the two insureds are healthy and between the ages of 35 and 55. This low cost results because COI charges are based on the probability of death of the surviving insured in each policy year (which means that both insureds would have to die by that particular policy year). Thus, survivorship accumulation products will generally have much lower COIs than single life accumulation products, at least until the later attained ages, and will also typically have lower cumulative COI charges. However, one must consider that when comparing the accumulation of cash value in survivorship policies to that of single life policies, the latter will typically have a lower minimum non-mec face amount. As a result, you may be comparing, for example, a single life $400,000 minimum non-mec face amount to a survivorship $600,000 minimum non-mec face amount assuming the same premium paying pattern. Consequently, although survivorship products generally offer lower COI rates, they may have somewhat higher per $1,000 charges, as compared to single life products, when electing the minimum non-mec face amount for a given premium level. So, depending upon the ages and underwriting classes of the two insureds, a carrier s survivorship product may often accumulate more cash value and may provide more retirement income and death benefit than any of the carrier s single life products because of its overall lower policy charge structure in minimum non-mec face amount scenarios. For example, AXA s BrightLife Grow Survivorship product usually outperforms BrightLife Grow, its single life indexed accumulation product, in terms of retirement income and death benefit when the same premium stream is specified and the minimum non-mec face amount is solved for. There may be other cases, however, where the retirement income produced by a single life product of an insurer (using the best insured in terms of age and underwriting class) may be similar to, or may even slightly exceed, the retirement income produced by the survivorship product of that insurer. In cases where a face amount is specified, a survivorship accumulation product will almost always outperform a single life product in terms of cash value accumulation and retirement income as a result of its lower charge structure. Note that the age and underwriting differences (if any) between the two insureds, and whether the minimum non-mec face amounts of the single life and survivorship products qualify for the most attractive rate bands, will also enter into the differences in retirement income provided by a single life product and a survivorship product. 8 survivorship life insurance

Here s an example. BrightLife Grow Survivorship for two 45-year-old preferred insureds, a male and female, who are also non-tobacco users, has a minimum non-mec initial face amount of $705,698, assuming a premium of $20,000 for 20 years and using Option B with GPT. They switch the death benefit option to Option A as they begin to take distributions. The annualized distributions beginning in policy year 21 are $77,306 for 20 years with $1,000 of cash value targeted at age 121, assuming a 10% cap, a current illustrated rate of 6.91%, and current policy charges. If a single life accumulation policy such as BrightLife Grow was used instead on the male referenced above and with similar assumptions, the minimum non-mec initial face amount is considerably less ($428,072). The supplemental retirement income, assuming the same premium paid for 20 years using GPT and Option B until retirement, is $75,524 for 20 years, somewhat smaller than the survivorship product. In addition to the greater amount of retirement income available from using BrightLife Grow Survivorship, for the same level of investment the clients have an additional $277,626 of death benefit they can put toward a legacy plan. Similarly, if a BrightLife Grow policy had been taken out on the 45-year-old preferred female, the minimum non-mec initial face amount is $579,649. Paying the $20,000 premium for 20 years and using the same assumptions as for the other examples, supplemental retirement income of $74,046 is illustrated for 20 years. Thus, you can see the lower charge structure of the survivorship product in this example produces more income than a single life policy on either insured using the same assumptions despite having a higher face amount. But the death benefit, of course, is not paid until the surviving insured dies as compared to the more immediate death benefit payable from a single life product. This presentation is used to illustrate how an assumed rate of return could affect premium value calculations. The values represented here are for a BrightLife Grow Survivorship on a 45-year-old male preferred non-smoker and 45-year-old female preferred non-smoker, a BrightLife Grow policy on a 45-year-old male preferred non-smoker, and a BrightLife Grow policy on a 45-year-old female preferred non-smoker. The values reflect the cost of 20 years of premiums illustrated at a 6.91% gross rate of return and current charges. If you were to receive a 0% gross rate of return and maximum charges were assessed in the policies, the policies would fail in years 24, 24 and 23, respectively, by which point $400,000 of cumulative premium would have been paid. Please refer to the basic illustration and current prospectus for more information. Your values will be different based on your gender, age and health. Work with your Financial Professional/licensed insurance agent to create an illustration that is tailored to your specific situation. survivorship life insurance 9

conclusion Survivorship indexed universal life accumulation products often outperform their single life indexed universal accumulation counterparts with respect to building cash value and providing retirement income. In situations where the prospects goal is to maximize supplemental retirement benefits, two insureds are available, and there is no need for additional insurance at the first death of either insured, a survivorship accumulation product often makes sense. Financial professionals should consider comparing a survivorship indexed accumulation product in these circumstances to a single life indexed accumulation product to see which may provide more benefits for clients. 10 survivorship life insurance

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BrightLife Protect, BrightLife Protect Survivorship, BrightLife Grow and BrightLife Grow Survivorship are issued in New York and Puerto Rico by AXA Equitable Life Insurance Company (AXA Equitable), New York, NY and in all other jurisdictions by MONY Life Insurance Company of America (MLOA), an Arizona Stock Corporation with its main administrative office in Jersey City, NJ. (MLOA is not licensed to do business in New York and Puerto Rico) and are co-distributed AXA Network, LLC and AXA Distributors, LLC, 1290 Avenue of the Americas, New York, NY 10104. Please be advised that this document is not intended as legal or tax advice. Accordingly, any tax information provided in this document is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matters(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor. Neither the AXA Equitable Life Insurance Company nor its affiliates provides tax or legal advice. The information provided is based on our general understanding of federal income, gift and estate taxes. The client must rely solely on advice from his or her own tax and legal advisors. AXA is a brand name of AXA Equitable Financial Services, LLC and its family of companies, including AXA Equitable Life Insurance Company (NY, NY), MONY Life Insurance Company of America (AZ stock company, administrative office: Jersey City, NJ), AXA Advisors, LLC, and AXA Distributors, LLC. AXA S.A. is a French holding company for a group of international insurance and financial services companies, including AXA Equitable Financial Services, LLC. This brand name change does not change the legal name of any of the AXA Equitable Financial Services, LLC companies. The separate obligations of AXA Equitable Life Insurance Company and MONY Life Insurance Company of America are backed solely by their claims-paying ability. 2015 AXA Equitable Life Insurance Company. All rights reserved. G35917 GE-105433 (7/15) (Exp. 7/17) Cat. #154402 (7/15)