The Surprise ‘Expiration Date’ On Life Insurance Policies

By Darwin Bayston

The Wall Street Journal recently brought attention to a problem that is quietly impacting the estates of Americans who are fortunate enough to realize their 100^th birthdays: the expiration of the life insurance policies they believed to be permanent assets.

Some whole and universal life insurance policies in force today were designed to cover the insured through age 99. This age limit is a formality that once was given little thought since it was a rare feat to live past that age. But thanks to improvements in medicine and healthier lifestyles, the number of American centenarians has climbed by 44 percent since 2000.

That means there are elderly Americans who own life insurance policies – assets they believe will yield substantial death benefits for their heirs when they pass away – who may in fact hold policies that are on the verge of expiring. When that happens, some of these policies are structured to pay out the full death benefit to the policy owner as the policy is considered to have matured. Unfortunately, other consumers with the age 100 expiration provision built into their policies will face the termination of the death benefit and an immediate payout of the built-up cash value in the policy on their 100^th birthday.

So that $3 million death benefit your elderly client had planned to leave behind to his family, perhaps as a vehicle for funding estate tax bills or to finance his heirs’ educational expenses? It may be about to disappear and be replaced with a check for as little as $100,000. There is currently litigation underway to challenge the legality of some of these policies, but insurers have so far remained steadfast in their decision to terminate these expired policies and pay out the net cash value they contain.

Wealth managers and estate planners need to be aware of this growing issue and provide their clients with wise counsel on what to do with any life insurance policies that are on course for this potential expiration. For certain clients, there may be some options available if they move proactively to maximize the value of their life insurance assets.

For example, for a client who has a terminal illness, you might be able to seek an accelerated death benefit, allowing your client to take some cash out now. Another option might be to consult with a tax professional about the possibility of assigning the policy to a nonprofit organization as a charitable gift. Or you might consider helping your client sell the policy now through a life settlement transaction.

With a life settlement, your client sells the policy to a third-party investor and receives a cash payout, thereby monetizing the asset immediately. The new owner takes responsibility for paying the premiums and also assumes the risk that the policy will not pay a death benefit if your client lives past their 100^th birthday.

To be clear, for the past decade or so, the life insurance industry has generally adopted age 121 as the standard maturity date in new whole or universal life policies. So for preretired clients and even retired clients in their 70s and 80s whose policies have plenty of time prior to maturity, there is no reason to panic.

But if you have a client who is currently more than 90 years old with a life insurance policy set to expire at age 100, that client and/or their family members need to understand the risk and rewards of keeping the policy in force. If the policy is no longer needed or wanted, you may want to counsel the client on their exit options prior to the risk of policy termination by the insurer.

An unknown number of policies with the 100-year-old limit still in force are out there. So it’s a good time for wealth managers and estate planners to review all life insurance policies owned by your elderly clients. The life insurance expiration date problem is proof that not all unexpected birthday gifts are happy surprises.

Darwin M. Bayston, CFA, is the president and chief executive officer of the Life Insurance Settlement Association. He may be contacted at [email protected].

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