Friday, November 17, 2017

No. 241: The Age 100 Problem—An Update

In No. 141 (posted February 1, 2016), I wrote about what I call the "age 100 problem in cash-value life insurance," a topic on which I had written two articles in The Insurance Forum in 2001. In No. 226 (July 20, 2017), I discussed an elderly insured's lawsuit against Transamerica Life Insurance Company relating to the problem. In this update I discuss two recent developments.

The Lebbin Case
Gary Lebbin was born in September 1917 in Germany, came to the United States in 1938 to escape Nazi persecution, and married in 1944. His wife died in 2015 at age 97. He has two children, four grandchildren, and seven great-grandchildren. In 1990 he created a trust that purchased two universal life policies from Transamerica with a total face amount of $3.2 million. His two children are the trustees of the trust.

In July 2017 Lebbin and the trust filed a lawsuit against Transamerica. They alleged that Transamerica had falsely represented the policies as "permanent insurance" for his "whole life," that the company had refused his request to extend the policies beyond their terminal age of 100, and that he was facing a potentially serious income tax problem. In September 2017 Lebbin reached the policies' terminal age of 100.

On October 2, 2017, Transamerica filed a motion to transfer the case from the federal court in Maryland (where the trust and one of the trustees are located) to the federal court in the southern district of Florida (where the policies were originally sold, where one of the trustees is located, and where other potential witnesses are located). On October 16 Lebbin and the trust filed an opposition to the motion. On October 30 Transamerica filed a reply to the opposition. On November 3 Transamerica filed a record of the exhibits supporting the motion. The judge has not yet acted on the motion.

Lincoln's Extension Offer
On October 30, 2017, Lincoln National Life Insurance Company sent a newsletter to its field force. The first two pages contain an article entitled "Extension of Maturity Offer—Beginning October 30, 2017." The first paragraph of the article reads:
In response to agent and policyowner requests and to better align with industry practices, beginning October 30, 2017 Lincoln is offering to extend the maturity date on certain permanent life insurance policies in order to preserve the death benefit within the contract and help avoid a taxable event. These older products typically have maturity dates ranging from age 95-100, and due to the age of this business, policies are beginning to approach these dates. Newer products often contain a maturity extension feature as part of the base product.
Lincoln said it will write to each policyholder eight to twelve months before the original maturity date, and the first mailing will occur on November 13, 2017. Each mailing will include an offer letter, the policy amendment, and an acceptance form the policyholder must sign and return to the company at least 30 days prior to the policy's original maturity date.

The policy amendment has been approved in all jurisdictions except Florida, Louisiana, Massachusetts, Missouri, New Hampshire, New York, Pennsylvania, Puerto Rico, Virgin Islands, and Virginia. Pursuant to the Indiana Public Records Act (Lincoln is domiciled in Indiana), I obtained the approval file from the Indiana Department of Insurance. The policy amendment was submitted for approval on December 29, 2016, and the Department approved it on January 24, 2017.

Included in the approval file is a sample of the offer letter, which will be over the signature of Lincoln's president, Dennis R. Glass. The final paragraph of the offer letter reads:
There may be tax consequences to either surrendering the Policy on or after the maturity age or continuing the Policy past the maturity age of the applicable Insured(s). A tax advisor should be consulted to determine which choice best meets Your needs.
I believe that Transamerica's motion to transfer the Lebbin case from Maryland to Florida is a delaying tactic. I hold that belief because, even if the case survives the inevitable motion to dismiss, I think the case will never go to trial. I believe that the case will be settled quietly, and that we will never learn the terms of the settlement because it is an individual case rather than a class action. Moreover, even if it were a class action and the settlement terms were made public, I think the age 100 problem would remain unresolved.

As I discussed in No. 141, there appears to be no guidance on how an insured who reaches the terminal age of 96 (in whole life policies based on the American Experience mortality table) or the terminal age of 100 (in whole life policies based on the 1941 CSO, 1958 CSO, or 1980 CSO mortality tables) can avoid a potentially serious income tax situation. The problem is that the insured who accepts an offer to postpone receipt of the death benefit beyond the terminal age could be viewed as having constructive receipt of the death benefit at the terminal age.

All types of firms invariably refuse to provide tax advice to customers. In the case of life insurance, in the absence of guidance, I do not see how a tax advisor can provide sound advice to a client.

Available Material
I am offering a complimentary 16-page PDF consisting of the article in Lincoln's newsletter (2 pages) and Indiana's approval file for Lincoln's new rider (14 pages). Email and ask for the November 2017 package about the age 100 problem.

In my two previous posts on the subject, I offered complimentary packages that are still available. In No. 141, I offered a 37-page package consisting of the two 2001 Forum articles, an excerpt from a variable universal life prospectus, a 2009 request for comments from the Internal Revenue Service (IRS), a 2009 comment letter from the American Council of Life Insurers, and a 2010 revenue procedure promulgated by the IRS; ask for the February 2016 package about the age 100 problem. In No. 226, I offered a 54-page package consisting of Lebbin's complaint and an exhibit showing one of Lebbin's policies; ask for the July 2017 package about the age 100 problem.