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Age 121 is the New 100: 3 Ways to Rescue Older Policies for Your Clients

Permanent life insurance policies were designed to last a lifetime. Once upon a time, lifetime was defined as age 100 since few people lived past age 100.

As of 2001, with medical advancements and better healthcare outcomes, the new actuarial tables (CSO 2001) reflected more people living past age 100. From an insurer’s perspective, lifetime began to be defined as age 121.

You see, before 2001, insurers calculated how much premiums a policyowner needed to pay for a given time period before the policy’s cash values would equal the initial death benefit and so that the policy would last a person’s whole life, or to age 100. At that point, a life insurance policy was assumed to “mature” at an insured’s age 100.

So, what does it mean when a life insurance policy “matures” at age 100?  Essentially it means the life insurance coverage ends and the policy owner receives its investment in the contract and any gains, subject to taxation.

Very simply stated, the owner of a policy will have paid in full for the initial face value of the policy, or a portion thereof, based on an assumed interest rate or dividend crediting rate, minus internal policy charges, from the time the policy was issued to the date of maturity. The policy owner then receives an amount based on whether the life insurance contract is an “endowment” contract or not (discussed below).  If the insured dies before the maturity date, the insurer steps in to pay the claim based on the initial policy face amount.

Therefore, for whole life policies that were issued prior to 2001, the policy coverage terminates at age 100.  However, it is possible for the maturity date to be extended beyond age 100– by contract, policy rider or insurer guidelines. Thus, 3 options at age 100 on pre-2001 whole life policies are as follows:

1. Termination.

If the insured is still living at age 100, policies that are “endowment” policies will payout. The caveat here is that, since the insured is still alive, the payout is not in the form of tax-free death benefit proceeds, as would be the case if the death proceeds were paid due to death prior to the maturity date. Instead, the policy’s cash value in the amount of the initial death benefit is paid out, except that the entire payout is taxable as ordinary income (net of premiums paid). Ouch!

Note that policies that are not “endowment contracts” will have a payout of cash value that is less than the death benefit. That is, the cash value payout is based on premiums paid into the contract, minus policy expenses and insurance charges. In most of these cases, there will be a loss. However, this loss is not tax-deductible and if there happens to be a gain when all is said and done, again, the gain will be taxable as ordinary income. Ouch squared!

What’s more — Policy Loans taken on these older whole life policies, often designed to pay ongoing premiums way into the future, may lapse right before maturity — in which case there will be taxes due even though there will no longer be life insurance coverage. If the “loaned” policy does not lapse and indeed lasts until the insured’s age 100, the loan is technically extinguished at that time and subject to ordinary income tax, leaving little or no cash value payout.  Ouch to the third power!

2. Maturity Extension.

Although many pre-2001 life insurance policies have no contract language extending maturity, many insurers do have their own guidelines for policies that mature at age 100. Generally, these guidelines follow the rules of the “extended maturity” provisions contained in newer policies (policies issued post-2001).

Generally, the ‘Extended Maturity’ — in the form of a guideline, contract provision or policy rider (MER) — provide for the following:

  • Premium payments stop
  • Policy admin charges, expenses and cost of insurance charges stop
  • Policy loans are either repaid or remain on the policy
  • Loan interest charges continue on any policy loan balance

Find out if the policy has a Maturity Extension Rider (MER), or if the insurer has guidelines that allow it to extend the maturity of the contract and what the terms of the MER are; i.e.: the death benefit beyond age 100 is equal to the death benefit at age 100 or is equal to the cash value at age 100. The former is a better result than the latter. However, in both scenarios, the owner of the policy will not be subject to taxation (unless there is an outstanding loan, as described above).

3. Policy Exchange.

If the insurer does not offer a MER, or the MER is equal to the cash values at age 100, the policy maturity can be extended if the policy is exchanged to a new life insurance policy or an annuity. The prospects for an exchange are favorable given how cost-efficient newer policies have become and the age 121 maturity included in the pricing. In some cases, no additional premiums may be required even at advanced ages or even for insureds who may have some medical issues. However, the younger the insured, preferably in his or her 70s, the more favorable the underwriting and the overall economics of the exchange will be.

For more information on this topic, also see Top 5 Responsibilities of an ILIT Trustee; 3 Options for Dealing with Policy Loans; and Keys to Dealing with Policy Loans.

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