There are remediation options for policies experiencing a significant decrease in death benefit after policy maturity
- The total death benefit plus cash value Maturity Extension is typically associated with universal life contracts that have an “increasing” death benefit. Most increasing death benefit contracts have a total death benefit equal to the death benefit plus the cash value in the policy. After policy maturity, the total death benefit will continue to equal the base death benefit plus the remaining cash value.
- The greater of total death benefit or cash value, is the most common provision on universal life contracts. A policy designed to mature with minimal cash value with this provision would continue beyond maturity with the death benefit in place just prior to the maturity date. Alternatively, if the cash value at maturity is in excess of the policy’s face amount, the death benefit provided by the maturity extension provision would equal the cash value.
- Some universal life insurance policies have supplemental coverage, which increases the total death benefit. If the maturity extension specifies only the base death benefit, any supplemental coverage will be lost should the insured survive past policy maturity.
- Many universal life contracts have a maturity extension equal to only the cash value. This can be an issue for policies that are designed to have minimal cash value at maturity.
- For older policies it is not uncommon for there to be no maturity extension provisions. In these cases, the death benefit is eliminated and the insurance company will pay out the cash value in the policy if the insured survives to policy maturity. A taxable event would occur if the cash value in the policy exceeds the policy’s cost basis, which is typically the premium dollars paid into the policy.
For example, if the insured is younger than 85 years old and in good health, it may be prudent to replace the current payday loans in Eastlake policy with a policy that ensures coverage at death. If the insured is over the age of 85 or no longer insurable, it is important to know the health status of the insured. If they are not healthy, perhaps living to the maturity date is not a concern.
If they are healthy, it is important that the trustee understands the risks of outliving the coverage and potentially forfeiting the death benefit and all premiums paid into the policy if there is little to no cash value at maturity
In conclusion, it is important that the trustee perform the following when evaluating the risk of surviving to policy maturity:
If no provision exists in the contract, it is advisable to contact the carrier to provide written correspondence of the post-maturity benefit provision.
- Age of the insured
- Health status of the insured
- If insurable, are there more competitive products with maturity extensions equal to the total death benefit available?
- If not insurable, is the insured aware of the potential drop in death benefit should he or she survive to policy maturity?
RIC provides unparalleled service to trustees and fiduciaries managing unique and hard-to-value assets. We are an independent risk manager and Registered Investment Advisor with the specialized expertise required to manage, analyze, value and administer trust owned life insurance, annuities, variable invested assets, closely held businesses and other unique assets. Since 2001, RIC has been the nation’s leading provider of independent risk management solutions for banks and trust companies.
Ultimately, an important first step when an insurance company’s financial strength is flagged as “Vulnerable” (an RIC classification) on a policy review is to learn the source of the “Vulnerable” rating. Do all five rating agencies consider the company “Vulnerable,” or only one? To what degree is the grade below the “Secure” level? If the policy is otherwise performing well, there may be no cause for further action aside from monitoring the company’s financial strength more closely. If the policy is no longer suitable or impaired in some manner-underfunded, lacking competitiveness, indebtedness-then a “Vulnerable” rating may be an impetus to explore policy replacement. Life insurance policies can have numerous moving parts and factors that affect their performance. The financial health of the insurer of the policy is one more element that needs to be monitored and evaluated on an ongoing basis.
If exploring different payment or death benefit scenarios with the current policy is not producing satisfactory options, there could be advantages to policy replacement A newer policy from the same or different insurance carrier may be able to provide more favorable insurance charges, offer higher interest crediting, or be more easily re-structured. If the insured is still healthy and willing to go through medical underwriting, policy replacement may produce a better performing policy.
Obtain new illustrations from the insurance carrier projecting policy performance with suspended premium. First and foremost, an illustration from the insurance carrier showing the effects of a suspension of premium should be acquired. This will inform the trustee as to how long the policy will persist without any further premium contributions. Depending on the age of the insured and how well the policy was previously funded, the policy may lapse almost immediately or persist for many years without any further premium payments.
Most whole life policies can be converted to a paid-up status, albeit with a reduced death benefit. With all of the potential moving parts of a whole life policy, it is important for the trustee to work with the insurance carrier to determine what methods are possible to best maintain the policy if no further out-of-pocket contributions will be made.
Additionally, some whole life policies contain a term component of insurance that if reduced or eliminated may make full premium payments through dividends more feasible to achieve
While life settlements may seem like an excellent option in the right situation (imminent lapse, unaffordable premiums, exploring policy surrender), it should be noted that not all policies qualify. Generally, the policy must meet the following criteria to be considered a candidate for a life settlement:
A life settlement is the sale of a life insurance policy, on a senior insured, for a payment greater than the cash surrender value but less than the death benefit. The buyer of the policy takes over all premium payments and receives the death benefit upon the insured passing away. It makes perfect sense in the right situation (policy is no longer affordable, no longer needed, going to lapse, etc.) for fiduciaries that serve as Trustee to consider a life settlement instead of simply having the policy lapse or be surrendered back to the insurance company for a fraction of the value. Why? The policy may be marketable in the secondary market and as Trustee, there is a duty to maximize the value of this asset which might be missed if it simply lapses or is surrendered.
To better understand each of the options listed above, we will review a sample of how policy proceeds are paid upon death following the Maturity Extension.