Archive

Author Archive

Life Insurance at Policy Maturity

August 15th, 2022 No comments

The policy death benefit often doesn’t stay in force automatically; you have to ask for it.

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.

Bad News

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:

  1. You request that coverage terminate. (Such request requires a surrender of this policy.)
  2. The insured dies.
  3. The sooner of the policy Coverage Expiry or Termination Date.
  4. 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.

Good News

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:

  1. the Death Benefit provided by the Death Benefit Option chosen; or
  2. the Minimum Death Benefit as of the date of death

Termination

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

  1. 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;

  1. the Policy must be in force on the Scheduled Maturity Date;
  2. 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;

  1. 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.comwww.BillBoersmaOnLifeInsurance.infowww.XpertLifeInsAdvice.com or email at bill@oc-lic.com or call 616-456-1000.  

Categories: Life Insurance Tags:

When a Life Insurance Company Wants to Buy a Policy Back

July 18th, 2022 No comments

Why would they do this? What are the advantages/disadvantages of accepting this offer?

I recently received another communication from a life insurance company looking to purchase back from the policy owner a life insurance policy issued years earlier.  Offers like this happen periodically, but this is the first time I’ve see it from this carrier.

In these situations, the insurance company offers the policy owner more money than the current cash value to surrender the policy.  This approach often take the policy owner by surprise, and they start asking questions.  The first is “Why would they do this?” For full post, click here…

Categories: Life Insurance Tags:

Leimberg Article: Bill Boersma: Risk Profiles of Life Insurance – Don’t Take Conventional Wisdom at Face Value

July 12th, 2022 No comments

Categories: Life Insurance Tags:

A Major Consideration Regarding Term Insurance

June 29th, 2022 No comments

What product the policy can be converted to is an important issue.

Life insurance, in general, isn’t something that should be commoditized, though term insurance is the product many consumers feel has the fewest downside ramifications when spread-sheeted and sold on a cost basis.

There have always been some differences in the products of various insurance carriers, but the biggest difference, in my opinion, involves

conversion features and language. Carriers have different rules regarding conversion to a permanent policy down the road, including to what age a policy is convertible, how many years it’s convertible and to what product the term policy is convertible. For full post, click here…

Categories: Life Insurance Tags:

Whole Life Policies Using Loans

June 22nd, 2022 No comments

A lot can go wrong if you don’t examine the numbers.

I’m getting enough questions that it seems like a reasonable idea to keep on this whole life (WL) explanation track. Immediately after writing about a recent experience regarding how direct recognition loans affect a WL policy, I was brought into another situation involving policy loans. The loans weren’t ancillary; they were the point of the transaction.

Some insurance companies practice direct recognition loans and some practice non-direct recognition loans, which means some policies will have dividends affected by a loan and some won’t.

While uncommon, there’s a carrier or two that swing both ways. With the carrier at the center of this engagement, direct recognition results in a fixed loan rate, and non-direct recognition results in a variable loan interest rate. For full post, click here…

Categories: Life Insurance Tags:

Busting More Whole Life Policy Myths

June 6th, 2022 No comments

What direct recognition is and what it’s not.

When it comes to dividend-paying whole life (WL), there are direct recognition and non-direct-recognition policy loans. Direct recognition loans allow the insurance company to set a different dividend rate for a policy with an outstanding loan. With a non-direct-recognition loan, the dividend is credited as if no loan exists and the loan is charged a separate loan interest rate.

There is a difference of opinion about which is “better,” and, as might not be surprising, each carrier touts the benefits of the way it leans. I’m not interested in wading into that debate today.

I was recently involved in an analysis in which the plan could involve a significant policy loan. This proposal was with a carrier employing direct recognition, meaning, the dividend could be different when loans are taken. The fixed 6% loan rate was being touted as a backstop to potentially higher commercial lending rates in the future. I agree that this could be an important feature and I’ve noted it myself in some scenarios. For full post, click here…

Categories: Life Insurance Tags:

Busting Whole Life Policy Myths

March 22nd, 2022 No comments

The conventional wisdom of what “whole life” is an how it works is often far from the truth.

When initially speaking with clients, I often hear reference to a “whole life policy.”  I’ve long since learned that this is a generic reference to permanent insurance, as opposed to term insurance.  Few policy owners understand that whole life (WL) insurance is simply one form of permanent insurance, and the menu of options out there is wide and varied. For full post, click here…

Categories: Life Insurance Tags:

A Peek Behind the Insurance Marketing Curtain

March 14th, 2022 No comments
The IUL marketing insurance companies sell the agents, who in turn, sell the public, doesn’t sit well with me.

The piece went out to the insurance carrier’s agents and announced the updated cap rates and maximum illustrated rates for their indexed universal life (IUL) products.  As has been the case for many years, they’re all going down.  This means that whatever the S&P 500 (or whatever index is being tracked) grows at, the maximum crediting rate in good years will now be at the lower cap rate.  There’s no judgment here; it is what it is, but it will suppress the future performance of the IUL contracts and make it even more challenging to support earlier projections and for policy owners to attain their goals. For full post, click here…

Categories: Life Insurance Tags:

Video: Premium Financed IUL

March 10th, 2022 No comments

Categories: BlogAnimate, Life Insurance Tags:

The Most Arrogant Man in the World

January 27th, 2022 No comments

When you’re right, you’re right.

Bill Boersma

A recent book, The Death of Expertise: The Campaign Against Established Knowledge and Why it Matters, is from one writer among a number discussing the American public’s growing hostility to expertise.  I see it in my industry.

It’s been about 20 years that I’ve been doing life insurance policy analyses to show policy owners and their advisors what’s happening to their contracts, and how a shifting economic market is affecting performance.  This isn’t rocket science, it’s just not understood and it’s in conflict with conventional wisdom.  The premise is that if your life insurance performance is based on interest rates and these rates are dropping, your policy won’t do what you think it will.  How complicated is that? For full post, click here…

Categories: Life Insurance Tags: