In 2000 I received a letter out of the blue from an individual who owned two traditional participating whole life policies in different companies with a combined face amount of more than $5 million. He was in his 80s and in good health. He wanted his beneficiaries to receive the face amount after his death, but feared he would incur a large income tax obligation if he survived to the policies' terminal age of 100 and received the face amount himself. He wrote the companies asking how to avoid the potential income tax problem. He did not receive straight answers.
I wrote to the chief executive officers of 20 life insurance companies inquiring about the problem. I received responses from only three companies, and those three did not provide straight answers. I became convinced that life insurance companies did not want to discuss the subject. I wrote articles in the January 2001 and May 2001 issues of The Insurance Forum about what I called "the age 100 problem." Later, on my blog, I wrote five posts about the problem: No. 141 (February 1, 2016), No. 226 (July 20, 2017), No. 241 (November 17, 2017), No. 269 (June 6, 2018), and No. 277 (July 17, 2018).
In June 2018 I conducted another survey by writing to the chief executive officers of 22 life insurance companies. I received responses from nine companies, but none responded to the heart of the survey. It involved a request from a hypothetical 93-year-old policyholder named Jones, who had purchased a $100,000 traditional participating whole life policy in 1975 at age 50. He had paid all annual premiums and had taken all dividends in cash. He had written to the company recently asking for assistance with a potential income tax problem should he survive to the policy's terminal age of 100. None of the responding companies provided information about the Jones policy. The survey and its results are described in No. 277 mentioned above.
Our Personal Policies
My wife and I have nine old traditional participating whole life policies issued many years ago by four life insurance companies. We have paid all premiums annually, have taken all dividends in cash, and, although we borrowed on the policies from time to time many years ago, we now have no policy loans outstanding. We are in our 80s. The cash values are getting close to the face amounts. Therefore, because the protection component of each policy (the face amount minus the cash value) is small, we now have little protection. We no longer need the protection, but we need to plan for the disposition of the policies. We do not identify the companies here because that is our private information.
Given the lack of adequate responses to the 2000 and 2018 surveys, I decided as a last resort to write to the four companies about our own policies. We knew they would have to respond, and we could complain to state insurance regulators if they did not. Our letters went out on July 9, 2018. Here I report on the progress thus far.
Company A has a small paid-up policy on my wife. We inquired about the current cash value and the amount of taxable gain that will be reported on a 1099 if she surrenders the policy in 2019. We also asked for a sample of the letter the company will send her as she nears the terminal age of 100 if she has not surrendered the policy. We think the letter will offer an option to keep the policy beyond the terminal age. The company provided the cash value figure and the amount of taxable gain, but declined to provide the sample letter.
On August 20 we filed a regulatory complaint. To date we have not received a reply from the insurance department or the company. At present we plan to surrender the policy in 2019 and pay the tax on the gain.
Company B has two small policies on my life. We inquired about the current cash values and the amounts of taxable gains if the policies are surrendered in 2019. We also asked for the sample letter.
Initially the company provided the current cash values, but did not indicate the taxable gains. Also, the company did not provide the sample letter. In response to our follow-up, the company still did not provide the sample letter. Also, instead of indicating the taxable gains on surrender in 2019, the company said this about each policy and the Internal Revenue Service (IRS):
The values in this policy do not meet [the company's] guidelines for tax reporting at this time, if the policy is surrendered for its cash value. The IRS does not require life insurance companies to calculate taxable amounts on policies that meet certain guidelines. This contract falls within those guidelines and [the company] will not send a tax notification to you or the IRS. Details of this transaction will be shown on your annual report, which you should receive after your next policy anniversary. If any changes are made to the policy between the calculation date and the transaction processing date, the values could change. If you should have additional questions regarding tax regulations, please contact your Tax Advisor.
We asked again for the sample letter, and requested the IRS guidelines. In response, the company again ignored our request for a sample letter, but provided these guidelines:
- Policy must be a nonqualified plan.
- Issue date must be before August 13, 1982.
- Gross cash value must be less than or equal to $5,000. Gross cash value equals the policy cash value including loans. Dividends are not factored into the equation.
- The rule only applies to surrenders and maturities.
The company cited "Treas.Reg.Sec.35.3405-1." I found that section, but do not fully understand it. The company again suggested contacting our tax advisor, and made this surprising comment:
It is the responsibility of the policy owner to determine "what," "if," and "how" to report the transaction to the IRS as part of their returns. We can only advise that the contract falls under the guidelines, which do not require us to review or report the transaction.
At present we plan to surrender the policies in 2019. We will follow our tax advisor's recommendation on how to report the transactions in our 2019 tax return.
Company C has three fairly large policies on my life and one small policy on my wife's life. We asked for a sample of the letter that would be sent to us if we should maintain the policies and approach the terminal age of 100. We also asked for estimates of the surrender values and estimates of the taxable gains that would be shown on the 1099s if we surrender the policies in 2019. On July 19 the company provided the surrender values but ignored our request for the sample letter and the estimates of the taxable gains.
On August 20 we asked again for the sample letter and the estimates of the taxable gains. On August 31 the company provided the face amounts and the surrender values, but again ignored our request for the sample letter and the estimates of the taxable gains.
On September 4 we filed a regulatory complaint. On September 10 the company provided the estimates of the taxable gains. Instead of providing the sample letter, the company provided copies of all four policies in their entirety and made these comments:
Please note that the policies in question do not have a stated maturity date; therefore, these contracts do not mature or terminate at age 100. These policies are not affected by the insured reaching age 100, and we don't have a sample letter to share with you.
Although the policies may not have a stated maturity date, they are based on mortality tables with a terminal age of 100. At this moment we do not know what will happen if we reach the terminal age; that is, we do not know whether the face amount will grow, whether premiums will continue to be charged, whether cash values will continue to grow, or whether dividends will continue to be paid. We do know that at present the amounts of life insurance protection in the policies are small, and the estimated taxable gains if we surrender the policies are substantial. At present we plan to surrender the small policy in 2019, but we do not know what to do with the three large policies.
Company D has one fairly large policy on my life and one fairly large policy on my wife's life. We asked for a sample of the letter that would be sent to us if we should maintain the policies and approach the terminal age of 100. We also asked for estimates of the surrender values and estimates of the taxable gains that would be shown on the 1099s if we surrender the policies in 2019. We received no reply.
On August 27 we filed a regulatory complaint. We received replies dated September 20 from the company and from the department. The company told the department and us that responses to our July 9 letter had been mailed to us on July 17, that we must not have received them, and that the company was now sending a more detailed response. The company's September 20 letter is signed by an officer who is a fellow of the Society of Actuaries. Here is the bulk of the letter:
You asked what will happen when the Insured reaches age 100. Your contracts do not specifically identify a maturity provision when the Insured reaches age 100. You can choose to leave the policies in force until death when the proceeds would be paid to your beneficiaries. Please note that under these contracts you would not receive any dividends beyond age 100 nor would any premiums be due. Alternatively, you could choose to access the cash surrender value via the options stated in your policy. It is not possible to accurately predict what the tax rules will be on your policy anniversary in 2034. [We] do not offer tax advice. You may want to consult your personal tax advisor regarding your particular situation.
The actuary's letter goes on to provide the projected surrender value in 2019 for each policy, along with the estimated taxable gain for each policy. We were astounded that, for each policy, the projected surrender value in 2019 and the estimated taxable gain in 2019 are identical.
On October 8 we asked the actuary how the company determined that the surrender values and the estimated taxable gains are identical. We also asked for confirmation of our understanding that, if we survive to the terminal age and leave the funds with the company, we would receive no interest on those funds. We also asked for the July 17 letters we did not receive. At present we do not know what to do with the two policies.
When we purchased life insurance many years ago, it did not occur to us that we would encounter income tax problems if we were fortunate enough to survive into our 80s. Now that we are there, we have decided to surrender the four small policies and pay the taxes. We have not yet figured out what to do with the other five policies. Many of our readers are life insurance experts, and we would welcome any thoughts they might have on how we should dispose of the five policies.
I offered complimentary packages in each of the five posts identified in the second paragraph of this post. The packages remain available. If you want to receive any of them, email email@example.com and ask for the ones you want using the language we used at the end of each post to describe the packages.