What’s good for the goose is good for the gander; or so we are told. But adages aren’t always truisms, so unfortunately the conventional wisdom behind them must be applied categorically and with ginger – especially when building financial justification for a case. The coverage guideline a carrier uses for one insurance need may not be applicable to another.
When buying insurance, a thoughtful purchaser and advisor always struggle with whether or not sufficient coverage now will do the job down the road – especially where there is a reasonable anticipation of increasing need. A good example is insuring against future estate tax liabilities.
Most successful clients know that they are going to be worth considerably more later
So they would rather go ahead and over-insure against the possibility of a higher tax bill, rather than risk less favorable medical underwriting if they were to wait and try to purchase more at an older age.
Most carriers will accommodate this concern by allowing clients to index their estimated taxable estate (usually an amount resembling their net worth) for inflation. A common formula allows application of a reasonable rate of interest (currently 3-4% unless compelling circumstances justify more) for a period equivalent to 75% of the insured’s life expectancy not to exceed 15 years.
The parameters differ from company to company, so the issue of indexing can influence the choice of carrier.
Future increase in asset value is also important when buying coverage to fund buy-sell arrangements
Co-owners set a current purchase price knowing that the business value will increase as the enterprise prospers. Soooo . . . one would think that the estate tax indexing guideline should apply here as well. But if you went to an underwriter back in the 16th century and argued, “Deeply drinketh the goose as does the gander” (that’s how they said it back then), he or she would tell you that it ain’t necessarily so.
Carriers will not allow anticipated increases in business value as financial justification for more coverage. Perhaps the concern is rooted in the fact that someone other than heirs could benefit if the insured’s goose is cooked at too early an age. Advisors should suggest that otherwise unneeded key person coverage may be a justifiable source for the additional insurance sought.
Indexing, as well as many other issues related to financial underwriting, can create fewer problems when addressed early in the planning process.
Call us and talk about situations you have that may require some foresight when insurance is needed for estate or business situations.
Speaking of “honkers” – have you ever noticed that when a gaggle flies over in V-formation one side is always longer than the other. There is a good practical reason for this. It’s because there are more geese on that side.