When individuals purchase permanent insurance (whole life, universal life, variable life), as opposed to term insurance, the expectation is that the policy will remain in force as life insurance until death of the insured. However, due to a marked increase in longevity, many are likely to survive to the end of the mortality tables on which their life insurance policies are based. The bottom line is that there is a grave and imminent danger that many life insurance policies will terminate at age 100 and expose the policy owner to adverse income tax consequences.
Many policies issued prior to December 31, 2008, are based on mortality tables having a terminal age of 100. The terminal age is the age at which the table shows no survivors among insureds. In other words, the table is based on the assumption that no one among the insured population survives to age 100. So what happens if an insured lives to age 100? Some insurance companies offer the option of an extended maturity rider for universal life (but not whole life) policies based on older mortality tables that have a terminal age of 100. While the typical traditional whole life policy does not specifically say the face amount is paid to the policyholder at the terminal age, many companies indicate that they will pay the face amount if the insured survives to the terminal age, along with a 1099 showing any taxable income. Even if a policy provides for a life extension rider, which continues the life insurance benefit beyond age 100, there is a risk that the policy may not qualify as life insurance under the Federal tax law after the insured reaches age 100. The fact that the contract has fully matured may affect the treatment of the policy owner under the income tax doctrine of constructive receipt, or may affect the treatment of a beneficiary under the contract if amounts are received not by reason of death but by reason of the insured’s attainment of age 100. It is an understatement to say that the age 100 problem is serious, and will only become more so as life expectancy increases. Sapers & Wallack has expertise in conducting policy reviews that address the age 100 problem and is available to properly analyze and advise on life insurance portfolios. If you would like to engage us to conduct a complimentary review, please email Ed Wallack at ewallack@sapers-wallack.com.