Life insurance policies have become increasingly complex, especially for insureds who live beyond policy maturity. Historically an unseen risk, due to enhancements in medical care along with good health habits, insureds are living longer. The risk of the insured living to maturity is especially true for policies issued before 2009, which utilized older mortality tables developed in 1980 or even as far back as 1952. It is not unusual for these contracts to have policy maturity at the insured age of 90, 95, or 100.
A Changing Landscape
The demographic landscape is constantly changing. According to PEW research, the number of Americans ages 100 and older is projected to more than quadruple over the next three decades, from an estimated 101,000 in 2024 to about 422,000 in 2054. With the rise of centenarians, policies today are issued with maturity ages of 120 and beyond.
Maturity Risk
Universal life policies maturing after age 100 bring forth unique challenges for trustees. These older policies typically mature for the cash value only, which can create two major issues:
First, if the policy contract matures for the cash value, not the death benefit, the proceeds could be subject to taxation, just as if the policy were surrendered for its cash value. The amount received over cost basis would be subject to income (not capital gains) tax rates.
The second, and more common scenario involves policies maturing with minimal cash value, leaving beneficiaries with a fraction of the expected amount. Maturity extension riders, while addressing tax concerns, may not fully safeguard the trust’s value. This becomes increasingly pertinent as grantors age, emphasizing the importance of proactive communication with both grantors and beneficiaries.
Conclusion
As our society ages, the challenges associated with managing universal life insurance policies become more pronounced. Trustees must adopt a prudent and well-documented process to navigate the complexities of aging policies. The trustee must perform the following when evaluating the risk of surviving to policy maturity:
- Determine the policy’s maturity date.
- Review the insurance policy and illustrations to determine the maturity extension provision.
- If no provision exists in the contract, it is advisable to contact the carrier to provide written correspondence of the post-maturity benefit provision.
- If the maturity extension does not equal at least the total death benefit, the following information should be determined:
- 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?
As the largest corporate trustee for ILITs, Life Insurance Trust Company has the tools and resources to manage the ever-changing terrain of trust-owned life insurance policies. To learn more about our successor trustee services and how they will benefit you, contact one of our experts today!
