Life insurance at maturity of the policy

Two policy owners have been referred to me by two advisers in the last two weeks with the same question. “Can you help us determine what will happen to the life insurance we have for Mom/Dad when they turn 100?”

The mother and father (from different families) were 99 years old. I had good news for one family and bad news for the other.

bad News

Here is some of the contract language for the family with the policy that will not continue past age 100:

“Termination. All coverage under this policy shall terminate upon the occurrence of any of the following events:

  1. You want coverage to end. (Such a request requires a waiver of this policy.)
  2. The insured dies.
  3. The earlier of the date the coverage expires or the policy is terminated.
  4. Free period ends.

We agree to pay the death benefit to the Beneficiary on receipt of proper proof of the Insured’s death while this policy is in force and before the Termination Date.

“Termination Date” means the date on which the surrender value is paid to the owner if the Insured is then alive. All insurance under this policy expires on the date of termination. The termination date is the policy anniversary closest to the Insured’s 100th birthday.”

This policy has a contract date of 1994, which is not unusual for a universal life policy of that era. It will pay out the cash value on the anniversary date nearest to the insured’s 100th birthday. Let’s assume for a moment that both the death benefit and the cash value are $1 million. The family will receive the money, but as it will not be classed as a death benefit, any gain, which could be substantial, will be taxed at ordinary income rates. If the cash value is $1,000, $10,000, or $100,000, then this is the check that will be mailed, with a taxable profit.

What else could happen? There are also policies where the cash value converts to a death benefit at age 100 and remains in effect. Given the scenario above, this could mean there was a death benefit of $1 million, or it could be much lower, depending on the cash value. The latter would be a disappointment, while the former would be effectively the same as if the full $1 million death benefit were simply left in place.

The next evolution of the product was for the full death benefit to remain in effect if there was at least one dollar of cash value in the policy at age 100. Although risky and probably not saving any significant amount of money, directing and funding a policy must have the minimum cash value of 100 would provide the full death benefit indefinitely after the policy reaches that point.

Guaranteed Universal Life (GUL) has taken evolution one step further. If the no-lapse guarantee is in effect, the full death benefit continues regardless of the cash value as long as the policy is structured that way. It is important to remember that a GUL policy is not necessarily for life. The policy can be guaranteed till the age of 90 but it is still a GUL policy. Some decision makers do not think that funding a policy until age 120 is worthwhile if funding it until 95, 100 or 105, for example, seems sufficient for their given situation.

Good news

Here is some of the contract language for the family with the policy continuing past age 100:

DATE OF ISSUE: 10/06/2003

AGE OF FIGURE: 80

INSURED CLASS: Standard without nicotine

DATE OF MATURITY: 08.10.2023

Cash redemption value payable on the scheduled maturity date unless extended at the option of the owner

Death benefits payable upon the death of the Insured

The death benefit is the greater of:

  1. the death benefit provided by the selected death benefit option; or
  2. the minimum death benefit at the date of death

Termination

The policy will terminate upon the earliest of the following events:

  1. the policy’s scheduled maturity date, unless you request to continue the policy beyond the date described below; or…

Scheduled maturity date

The scheduled maturity date is the last date you can choose to pay premium. Unless you choose to continue the Policy after that date, the Policy will be terminated and you will be paid a cash back value.

If elected, the Policy may continue in force after the scheduled maturity date subject to the following conditions;

  1. The policy must be in force on the scheduled maturity date;
  2. The owner, including any successors in title, must agree in writing to this extension and must be elected at least 30 days prior to the scheduled expiration 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 due date;

  1. 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 does not automatically remain in effect upon death; you have to ask for it. Yes, you either get the full death benefit or nothing (the cash value is currently $0) depending on whether you write a one-line claim and mail it to the home office. Seriously!

If this family didn’t ask their advisor and make some assumptions about the durability of the policy, as might be reasonable, they would wake up one day with nothing, not millions. This policy was brought into effect with a single premium of a 7 figure amount. This resulted in many death benefits that would have been needlessly wasted had the note not been dropped in the mail. I drafted the letter yesterday and sent it to the custodian to sign and send back so I can put it on the carrier. It’s not the first time I’ve done it.

Bill Boersma is a CLU, AEP and licensed insurance advisor. 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.