Wednesday, June 6, 2018

No. 269: The Age 100 Problem—An Update on a Lawsuit and Comments on My Upcoming Survey

I first wrote about "the age 100 problem" in cash-value life insurance 17 years ago, in the January 2001 and May 2001 issues of The Insurance Forum. More recently, on my blog, I posted three items: No. 141 (February 1, 2016), No. 226 (July 20, 2017), and No. 241 (November 17, 2017), each of which may be found by clicking on the post number. In each of those posts I offered complimentary packages that included my 2001 articles and other documents relevant to the subject.

In this post I provide an update on a federal court lawsuit filed in 2017 by Gary Lebbin, an elderly insured, against Transamerica Life Insurance Company. I also describe a company survey I am planning.

Background on the Lebbin Case
Lebbin was born in September 1917 in Germany, came to the U.S. 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 second-to-die universal life policies from Transamerica with a total face amount of $3.2 million. When his wife died, the policies became single-life universal life policies. His two children are the trustees of the trust.

On July 20, 2017, two months before Lebbin reached the policies' terminal age of 100, he and the trust filed a lawsuit against Transamerica. They alleged the company had falsely represented the policies as "permanent insurance" for his "whole life," the company had refused his request to extend the policies beyond their terminal age, and he was facing a potentially serious income tax problem. (See Lebbin v. Transamerica, U.S. District Court, District of Maryland, Case No. 8:17-cv-1870.)

The case was assigned to U.S. District Judge Theodore D. Chuang. President Obama nominated him in September 2013, and the Senate confirmed him in May 2014.

In September 2017 Lebbin reached the policies' terminal age. 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 a federal court in Florida, where the policies were originally sold, one of the trustees is located, and other potential witnesses are located. The motion to transfer was fully briefed by early November 2017.

Recent Developments in the Lebbin Case
On April 30, 2018, Judge Chuang issued a memorandum opinion and a brief order. He granted Transamerica's motion and transferred the case to Florida. (See Lebbin v. Transamerica, U.S. District Court, Southern District of Florida, Case No. 9:18-cv-80558.)

In Florida the case was assigned to U.S. District Judge Donald M. Middlebrooks. President Clinton nominated him in January 1997, and the Senate confirmed him in May 1997. U.S. Magistrate Judge Dave Lee Brannon was also assigned to the case.

On May 22, Judge Middlebrooks issued an order setting a trial date of January 22, 2019, referring the case to Magistrate Judge Brannon, and alluding to the possibility of mediation and settlement. On May 23, Magistrate Judge Brannon issued a detailed scheduling order indicating, among other things, that all discovery is to be completed by October 29.

General Observations on the Lebbin Case
I think the Lebbin case will end with a confidential settlement before the trial. I say "confidential" because the lawsuit is not a class action, and there is no requirement for the settlement terms to be made public. The last thing Transamerica wants is publicity about this type of case.

General Observations on the Age 100 Problem
In my writings about the age 100 problem, I have said the bedrock principles of life insurance marketing are the income-tax-deferred inside interest and the income-tax-exempt death benefit. Yet there is no guidance on how policyholders who reach 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 serious income tax problem.

Some insurance companies offer elderly policyholders an opportunity to postpone payment of the death benefit beyond the terminal age. However, the policyholder who accepts such an offer could be deemed as having constructive receipt of the death benefit at the terminal age.

Companies who offer elderly policyholders an opportunity to postpone payment of the death benefit beyond the terminal age tell their policyholders to "consult your tax advisor" before accepting the offer. However, in the absence of guidance, there is no way for a tax advisor to assist the policyholder in deciding whether to accept the offer.

My Upcoming Survey
After this item is posted, I will send it to some life insurance companies. I will set up a hypothetical case involving a traditional dividend-paying whole life insurance policy based on the 1958 CSO mortality table with its terminal age of 100. I will ask the company to explain how it would respond to an elderly policyholder who seeks the company's help in dealing with the potentially serious income tax problem should the insured survive to the terminal age. I plan to publish a blog post describing the survey results.

An Interesting Idea
Harold D. Skipper, Professor Emeritus of Risk Management and Insurance at Georgia State Universiy and a longtime reader of my blog, recently presented an interesting idea. He suggested that, some years prior to the terminal age, the company offer the policyholder a 1035 exchange to a policy based on the most recent mortality table, which has a terminal age of 121. In my survey I will ask the companies what they think of the idea.

Available Material
In my three previous posts about the age 100 problem (see the links at the beginning of this post), I offered complimentary packages that are still available. In No. 141 I offered a January 2016 package, in No. 226 a July 2017 package, and in No. 241 a November 2017 package.

Now I offer a complimentary 26-page PDF consisting of Judge Chuang's memorandum opinion (12 pages), his order (1 page), Judge Middlebrooks' order (3 pages), and Magistrate Judge Brannon's order (10 pages). Email and ask for the June 2018 package about the age 100 problem.