Two policy owners have been referred to me by two advisors in the past two weeks with the same question. “Can you help us determine what happens to the life insurance we have in place on mom/dad when they turn 100?”
The mom and dad (from different families) were both 99 years old. I had good news for one family and bad news for the other.
Here is some of the contract language for the family with the policy that wouldn’t last beyond age 100:
"Termination. All coverage under this policy terminates when any one of the following events occur:
- You request that coverage terminate. (Such request requires a surrender of this policy.)
- The insured dies.
- The sooner of the policy Coverage Expiry or Termination Date.
- The grace period ends.
We agree to pay the Death Benefit to the Beneficiary upon receipt of due proof of the Insured’s death while this policy is in force and prior to the Termination Date.
'Termination Date' means the date on which the surrender value is paid to the owner if the Insured is then living. All insurance under this policy expires on the termination date. The Termination Date is the Policy Anniversary nearest the Insured’s 100th birthdate."
This policy had a contract date of 1994, not unusual for a universal life policy from that era. It's going to pay the cash value out at the anniversary date nearest to the insured’s age 100. Let’s assume for a moment that both the death benefit and the cash value were $1 million. The family would get the money, but because it wouldn’t be classified as a death benefit, any gain, which could be significant, would be taxable at ordinary income rates. If the cash value was $1,000, $10,000 or $100,000, then that’s the check that would be mailed out, with any gain taxable.
What else could happen? There are also policies in which the cash value turns into the death benefit at age 100 and remains in force. Given the scenario above, this could mean there was a $1 million death benefit or it could be much lower, depending on the cash value. The latter would be a disappointment while the former would effectively be the same as if the $1 million full death benefit simply stayed in force.
The next product evolution was for the full death benefit to stay in force if there was at least a dollar of cash value in the policy at age 100. While risky and likely not saving any meaningful amount of money, targeting and funding a policy to have minimal cash value at 100 would provide the full death benefit indefinitely once the policy hit that point.
Guaranteed universal life (GUL) brought the evolution one step further. If the no-lapse guarantee was in effect, the full death benefit lasted regardless of the cash value, as long as the policy was built that way. It’s important to remember that a GUL policy doesn’t necessarily last for life. The policy could be guaranteed to age 90, but it’s still a GUL policy. Some decision makers don’t think funding a policy to age 120 is worth it if funding it to 95, 100 or 105, for example, seems like enough for their given situation.
Here is some of the contract language for the family with the policy that does last beyond age 100:
ISSUE DATE: 10/06/2003
ISSUE AGE: 80
INSURED CLASS: Standard Non-Nicotine
MATURITY DATE: 10/08/2023
Cash Surrender Value Payable on the Scheduled Maturity Date, unless extended by the election of Owner
Death Proceeds Payable at Death of the Insured
The Death Benefit is the greater of:
- the Death Benefit provided by the Death Benefit Option chosen; or
- the Minimum Death Benefit as of the date of death
The Policy will terminate upon the earliest of the following events:
- the Scheduled Maturity Date of the Policy unless You request to continue the Policy after such date as described below; or…
Scheduled Maturity Date
The Scheduled Maturity Date is the last date on which You may elect to pay premium. Unless You elect to continue the Policy beyond this date, the Policy will terminate and and Cash Surrender Value will be paid to You.
If elected, the Policy may continue in force after the Scheduled Maturity Date subject to the following conditions;
- the Policy must be in force on the Scheduled Maturity Date;
- the Owner including any assignees of record must agree in Writing to this continuation and must be elected at least 30 days prior to the Scheduled Maturity Date.
If any of the above conditions are not met, the Policy, if still in force, will terminate on the Scheduled Maturity Date.
After the Scheduled Maturity Date;
- the Death Benefit will become Level…
This policy tells a much different story. However, if you read the language, you’ll see something interesting: The policy death benefit doesn’t stay in force automatically; you have to ask for it. Yes, you either get the full death benefit or you get nothing (cash value is currently $0) depending on whether or not you write a one line request and mail it to the home office. Seriously!
If this family didn’t ask their advisor and made some assumptions about the policy lasting, as might be reasonable, they would’ve woken up one day with nothing, rather than millions. This policy was put in force with a single premium of 7-figure sum. That drove a lot of death benefit that would be needlessly squandered if the note wasn’t dropped in the mail. Yesterday, I drafted the letter and mailed it to the trustee to sign and send back to me so I can get it on file at the carrier. This isn’t the first time I’ve done so.
Bill Boersma is a CLU, AEP and licensed insurance counselor. More information can be found at www.OC-LIC.com, www.BillBoersmaOnLifeInsurance.info, www.XpertLifeInsAdvice.com or email at [email protected] or call 616-456-1000.