Tuesday, July 25, 2017

The Willard Scott Conundrum

For many years, Willard Scott would announce each morning those lucky folks who'd hit the 100 year marker in life. They likely didn't know, however, the impact that reaching such a milestone would have on any "permanent" life insurance they owned.

Wait just a minute there, Henry: what's with the "scare quotes?"

Glad you asked.

Recently, co-blogger Bob V tipped me to this article by insurance industry heavyweight Joseph Belth:

"For decades, life insurance carriers ... sold permanent universal life insurance policies, marketed as "insurance for life," utilizing outdated mortality tables that did not take into account the fact that Americans were, and are, increasingly living to and past the age of 100."

In his book "My Life in Court," the late, great litigator Louis Nizer wrote of a case where a young man was killed when the train he rode on his daily commute crashed and he was killed. The court originally based his lost and future wages on an older mortality table which generated a relatively modest settlement; Mr Nizer was able to show that this was a grave injustice due to more recent tables, and won a more substantial settlement for the young widow.

Now, what does a 1950's-era train wreck have to do with a centenarian's life insurance policy?

Well, it turns out that the life insurance industry seems to have been playing fast and loose with that word "permanent." The case at hand concerns a Universal Life policy, but this issue would appear to affect Whole and Variable Life plans, as well.

The problem is that when plans "mature" (end) at age 100, they aren't permanent:

"The life insurance industry has left its customers (who faithfully paid their premiums with the expectation that they would have coverage for the remainder of their lives) uninsured."

And it gets better:

"These terminations have exposed customers to adverse tax consequences that are in direct contradiction to the guarantees made when these policies were purchased."

One of the great benefits of cash value life insurance (another industry term of art, perhaps much more useful in this discussion) is that the equity in the policy grows with no taxes due if the policy is paid out as death benefit (those that do  cash in their policies early may have a tax liability if the amount they receive is greater than the premiums paid in). But what if you've paid your premiums in the expectation that the plan would pay out whenever it was that you shuffled off this mortal coil, only to learn that, upon reaching that wonderful milestone you'd be uninsured and, adding insult to injury, owe a potentially astronomical tax bill?

Now, some (many?) carriers have addressed this by issuing policies that go to age 120 (or 121). But that's only good for folks who've bought plans from these carriers in recent years. The vast majority of folks, I daresay, don't fall into this category.

And frankly, I'm a bit nonplussed that this issue has been so long under the radar. Why's that you ask?


"The United States currently has the greatest number of known centenarians of any nation with 53,364 according to the 2010 Census"

Of course, not all of them own life insurance, but even a small percentage means thousands, perhaps tens of thousands do.

What then?

Mr Belth proposes a class action lawsuit. My own understanding of these is that they generally benefit the lawyers that file them much more than the plaintiffs themselves. Still, if that's the clue-by-four my industry needs to address this, well...
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