Tuesday, July 17, 2018

No. 277: The Age 100 Problem—Results of a Survey

My most recent discussion of "the age 100 problem" was in No. 269 (June 6, 2018). There I provided an update on a lawsuit filed in July 2017 by Gary Lebbin, who became 100 years old in September 2017, against Transamerica Life Insurance Company. In that post I said I was planning a survey of life insurance companies about the age 100 problem. Here I describe the survey and the results.

The Survey
I sent the survey on June 8 by regular mail to the chief executive officers of 22 life insurance companies. The mailing consisted of a cover letter and an enclosure. The cover letter contained three assumptions and four questions. The enclosure was a reproduction of No. 269, which included links to three earlier posts on the subject. No. 269 and the earlier posts offered complimentary packages of information on the subject. The response date was June 29. Here are the assumptions and the questions:
Assumption 1. Mr. Jones purchased a $100,000 traditional dividend-paying whole life policy from your company in 1975 at age 50; the policy was not rated.
Assumption 2. He has paid annual premiums every year and has taken all dividends in cash.
Assumption 3. He has written to you in 2018 (at age 93) seeking your assistance with a potential income tax problem should he survive to the policy's terminal age of 100.
Question 1. Will you pay the death benefit to him at age 100? If so, please indicate the amount of taxable income you will report on the 1099. If you will not pay him the death benefit at age 100, please explain why you will not do so.
Question 2. What would you offer him as a way to avoid the income tax problem?
Question 3. If you offer him the option of postponing the payment of the death benefit beyond age 100, what would you say to him—in addition to advising him to consult his tax advisor—about the possibility of his being deemed in constructive receipt of the death benefit at age 100?
Question 4: No. 269 mentions the idea of a 1035 exchange into a more recent policy based on a mortality table with a terminal age of 121. What do you think of the idea?
The Responders
Nine companies acknowledged the survey in at least some fashion. However, some of them provided little or no information. Here are the responses, which I edited.

American United
An official requested the packages offered in the four blog posts. I sent the packages but received nothing further.

Gleaner Life
On question 1, President and Chief Executive Officer Kevin Marti said the society would send Jones a letter six months before the terminal date offering him the option of accepting an extended maturity endorsement (EME). On question 2, he said the EME reclassifies the surrender value as the new death benefit, and the cash value continues to earn interest until paid as an income-tax-free death benefit. He said he was not able to easily obtain the information to estimate the taxable gain, if any, in the sample scenario. He said he was fairly certain their dividend history would not be what an industry leader like Northwestern Mutual would have achieved. On question 3, he showed the full text of the letter offering the EME. On question 4, he said it may work in theory, but he expressed concerns. The society does not issue coverage at ages above 85, and he thought it might not be equitable to increase the net amount at risk at an advanced age without underwriting.

Guardian Life
President and Chief Executive Officer Deanna Mulligan said the company believes the intent of such policies is clear—protection for life. The company feels strongly that the right course is to keep that promise and allow the policy to remain in force and function as normal until death. A few months prior to the terminal date, the company informs the policyholder of the option to keep the policy in force. The company would pay dividends as usual, and the policy would perform as usual. If the policyholder chooses to surrender the policy for its cash value, the policyholder may do so at any time. There are many scenarios with tax and other financial implications, and given the complexity the company does not believe there is a one-size-fits-all answer. The company advises policyholders of the financial implications of their decisions, and encourages them to seek advice from their tax advisors as appropriate. One certainty is that it is our responsibility to keep the promise we made, adhere to the policy's intent, and provide protection for life that our policyholders expect and deserve. She thanked me for reaching out, and for bringing this important issue to light.

Massachusetts Mutual
An official said whole life policies issued by the company in 1975 do not have a maturity date. Once a policy is in paid-up status, the policy will continue in force and dividends will continue to be paid on the policy until either the insured dies and a death benefit is paid or the policyholder surrenders the policy.

Metropolitan Life
An official said the company spun off its retail business last year, it no longer sells individual life insurance, and the survey should be directed to companies still selling such insurance. I asked whether the company is still administering the business, and if not, for contact information at the company administering the business. I received no further response.

New York Life
On question 1, an official said no. The death benefit is payable to the named beneficiary at the time of the insured's death. What is available to the policyholder at the terminal age is the net cash value, which is the face value, plus any accrued dividend value, less any outstanding policy loans with interest. Based on the assumptions, when the policy reaches the terminal age of 100, the net cash value will be equal to the death benefit. At that time, if the policyholder chooses to surrender the policy and take a lump-sum cash distribution, the taxable income is the amount of the distribution that exceeds the policyholder's net premium cost. If the policyholder chooses instead to defer maturity and continue paid-up insurance coverage with no further premiums, there is no distribution until the insured's death and no gain is reported. On question 2, the official said the policyholder's decision whether to receive a cash distribution directly determines the amount of taxable gain realized from the transaction. If the policyholder chooses to defer the cash distribution until death, there is no gain to report. On question 3, the official referred to the response to question 2. On question 4, the official said the company chooses not to speculate or comment on the matter.

Northwestern Mutual
An official said the company does not automatically pay out the death benefit when the insured reaches the terminal age, although the company recognizes that other companies may handle the situation differently. The official said the Internal Revenue Service provided a safe harbor for policies to continue to qualify as life insurance after the insured attains age 100. The company urges policyholders to seek counsel from their tax advisors for any tax-related questions.

Prudential Insurance
An official said the company determined that my mailing was an unsolicited business submission from an outside party, and the company has a longstanding policy not to entertain such submissions. The official returned the mailing to me.

Sun Life Financial
An official expressed familiarity with my writings and appreciation for my dedication in providing information and perspectives on life insurance. The official said the company welcomes inquiries from policyholders and their representatives, but prefers not to answer hypothetical questions because of the many different kinds of life insurance policies. The official said any general answer could potentially misinform policyholders. For example, as a general matter, the company's participating whole life policies mature upon the death of the insured, not age 100, so coverage continues until the insured's death. The official said the company would have to review each policyholder's specific policy language to determine an actual response. Similarly, the company cannot say whether an adjustment to the terms of a policy is necessary or advisable. On question 4, the official said the company views this as a viable option well aligned with the regulatory intent of Section 1035, which allows deferral of taxation upon an exchange of one policy for a new policy that better suits a policyholder's needs.

The Nonresponders
Thirteen companies did not acknowledge receipt of the survey. Those companies are AXA Equitable, Great-West Life, Lincoln National, Manulife Financial, Minnesota Life, National Life (VT), Nationwide Life, Pacific Life, Penn Mutual, Phoenix Life, Principal Life, TIAA, and Western & Southern.

General Observations
I am disappointed that none of the companies assembled data for the Jones policy. I am also disappointed by the number of nonresponders. On the brighter side, I did better than on my survey 17 years ago, when I wrote to 20 companies and received responses from only three of them. It should come as no surprise to anyone who knows me that I am not deterred. I still think the age 100 problem is serious for life insurance consumers and the life insurance business. I plan to continue my efforts.

Available Material
I am offering a complimentary 11-page PDF containing a sample cover letter, the enclosure, and the addresses of the chief executive officers to whom I sent the survey. Email jmbelth@gmail.com and ask for the July 2018 package about the age 100 survey.