An Old and a New Problem
As the number of Americans reaching the age of 100 grows, a small but noteworthy problem rears its head. In many cases, life policies issued before the early 2000s mature at the century mark and the industry is left to figure out how to address the issue.
- Terrence Dopp
- August 2020
- The Issue: Many older life insurance policies designed to be permanent mature at age 100, meaning people who own those policies are often paid out a small cash value and forgo a death benefit.
- People: The issue has the potential to impact an untold number of policyholders as well as become a headache of sorts for the larger life insurance industry. The growing life settlements business has kept close watch on the issue.
- The Fix: The mortality tables that were extended to age 120 in the early 2000s, as well as extended maturity riders and consumer education, can help blunt the problem.
James Bainbridge, a Philadelphia attorney with 15 years of experience in insurance law who has represented all facets of the insurance world, was vaguely aware of the age 100 issue in permanent life insurance when the trust set up by Gary Lebbin first contacted him about representing it in a suit against Transamerica Life Insurance Co.
Bainbridge came across this issue several years ago while writing for a trade group, the Association for Advanced Life Underwriting. He'd also discussed the issue with Joseph M. Belth, a professor emeritus of insurance at Indiana University, who'd been warning of the issue since the early 2000s. While many companies have offered extended maturity riders and taken steps to correct the situation, others such as Transamerica have turned to litigation to avoid such actions, he said.
Lebbin had purchased whole life policies for himself and his wife from Transamerica. When he reached 100, the company said he'd reached the maturity age and was set to receive the cash value of the policy rather than a tax-free and higher death benefit.
“I do believe it's a case of first impression,” Bainbridge, founder and owner of The Bainbridge Law Firm, said, referring to a novel legal action that sets precedent. “The Court's decision finding language in Transamerica's universal life insurance policies in question incomprehensible will have implications for elderly insureds and their families who have had or will have their policies terminated at or near age 100.”
The so-called age 100 issue is a small but fascinating problem in the permanent life insurance world that for the companies is proving more of a headache than a cataclysm in the making.
This is in one sense a new problem, or relatively recent, and in another sense it’s a very old problem.
Insurance Information Institute
The number of Americans age 100 or more has grown steadily in recent decades, according to the U.S. Census Bureau. In the 1980 count, the agency registered 32,194 people who reached that milestone or a statistical 1.42 people out of 10,000.
The 85-and-over population is projected to more than double from 6.5 million in 2017 to 14.4 million in 2040 (a 123% increase), according to the 2018 Profile of Older Americans, a report from the Administration for Community Living, which includes the Administration on Aging, an operating division of the U.S. Department of Health and Human Services. Also, there were 86,248 persons age 100 and over in 2017 (0.2% of the total age 65-and-over population).
For the small subset of these folks who hold an in-force permanent or whole life policy written prior to the change in the extended mortality tables in the early 2000s, reaching 100 can mean hitting the terminal age of their policies. Because it was so rare in the past, policies were issued with that age as a hard wall at which the (lower as a rule) cash value of the policy was paid out and the death benefit canceled.
“This is in one sense a new problem, or relatively recent, and in another sense it's a very old problem,” said Steven Weisbart, senior vice president and chief economist at the Insurance Information Institute. “Numerically, I don't believe it's a large problem in terms of number of people affected, but for anyone who is in that category, it's an issue.”
The III focuses on creating and releasing information designed to help insurance consumers. It's made up of 60 insurance carriers and the group doesn't sell insurance or lobby.
In the early 2000s, the Commissioners Standard Ordinary Table was updated to push out that terminal age to 120 for the sake of industry planning and determining premiums in a move that largely insulates people who bought later policies from the quirk of aging. No reliable accounting exists for how many people may be caught in the loopholes and facing the issue head on.
Weisbart said the issue largely revolves around estate planning: People tend to make tax-free life insurance a centerpiece of their strategy. If they are paid a cash-value upon reaching the century mark, not only will the payout be reduced by some portion but it may also be subject to income taxes. In many cases this could undercut the benefit of passing on that money.
“From an income tax point of view, to the individual insured, it could be a pretty hefty income tax liability that wasn't planned for, wasn't desired and contradicts an estate plan,” he said.
It's an issue few want to talk about.
Michael Lovendusky, vice president and associate general counsel at the American Council of Life Insurers, said the issue is due to the changing times. The specifics of life insurance policies vary depending on the unique needs of the insured, issuers and regulations, he said. He pointed to the mortality table revisions as an example the industry has taken to address the issue.
“In addition to reading the terms of their policy, policyholders concerned that they are approaching their maturity age should consult with a financial adviser to discuss the impact of these details on their overall tax situation and what courses of action are open to them,” Lovendusky said in an email.
The Court’s decision finding language in Transamerica’s universal life insurance policies in question incomprehensible will have implications for elderly insureds and their families who have had or will have their policies terminated at or near age 100.
The Bainbridge Law Firm
Lebbin v. Transamerica
The most high-profile example of this issue has been the breach of contract lawsuit Lebbin v. Transamerica Life Insurance Company that Bainbridge has been involved with. The insurer is now appealing the decision.
Gary Lebbin was born in September 1917 in Germany and immigrated to the United States in 1938 to escape Nazi persecution. He was married to Bernice Lebbin and they had two children, four grandchildren, and seven great-grandchildren before she died in 2015 at age 97. 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. His two children are the trustees.
Second-to-die policies insure two lives and pay a death benefit upon the death of the second one covered. A judge in April found in favor of the Lebbin family on its claim of a breach of contract and awarded $2.53 million in damages, according to court documents.
Transamerica has placed about $2.8 million in escrow and is now appealing the decision in the U.S. Court of Appeals. A Transamerica spokesperson said they couldn't comment given the pending legal case.
“It is an understatement to say the age 100 problem is serious. Indeed, I think the problem is the Achilles' heel of life insurance,” Belth wrote in a 2017 blog post raising interest in the issue and that case. “The bedrock principles of life insurance marketing are the income-tax-deferred inside interest and the income-tax-exempt death benefit.”
In the course of reporting for this story, most of those interviewed cited Belth as the premier expert on the issue in the U.S. He declined to comment beyond the blog posts on his website. He first began raising the issue from the consumer perspective in 2001.
Both he and Bainbridge believe the outcome of the case could prompt a class-action lawsuit, and that would be the only way to force the industry and other interested parties to address the age 100 problem. If the suit made it past initial challenges by insurers seeking to have it dismissed, all sides would have strong incentives to avoid trial through a settlement, and that outcome would be in the public domain.
“I wouldn't be shocked if it went in that direction,” Bainbridge said. “That's kind of the natural evolution.”
Most sophisticated [life settlements] investors are acutely aware of [life insurance policy] extension risk.
Much like the scope of the problem itself, the life insurance industry's potential exposure can't readily be quantified. In-force individual life insurance protection in the U.S. totaled $12.1 trillion at the end of 2018, according to ACLI data. Determining a number would require figuring out the actual percentage of those who are over 100.
But one facet of the greater insurance industry that has kept a keen eye on this issue has been the life settlements business.
Simply put, life settlements are the sale of life insurance policies for more than the cash surrender value but less than the death benefit. The buyer agrees to continue paying premiums for the life of the insured, making the issue of life expectancy doubly crucial.
The market, which only kicked off in a meaningful way as a method for people to cover health care costs through so-called viatical settlements during the AIDS epidemic, has seen its ups and downs. But the most recent tabulation by global asset manageent firm Conning was that the market settled $3.8 billion in face value in 2018.
Prior to the 2008 financial crisis, the market had swelled to as much as $12 billion. However, like many facets of the financial world, it saw that size contract, Scott Hawkins, the firm's director of insurance research, said. Now investors looking for returns amid the low interest rate environment and growing consumer awareness have seen it grow and by 2028 Conning is predicting $6.4 billion in settlements.
“Robust is a relative term,” Hawkins said. “Investors lost interest, capital dried up and the market fell down to a billion and a half until about two or three years ago. That said, it's definitely turning around.”
Along with growing demand on the part of investors, he credits greater awareness on the part of policyholders and financial advisers for the increase. In some cases, regulators are also requiring a notice to life insurance policyholders before a possible lapse letting them know settlement is an option.
Christopher Conway, a principal and chief development officer at life expectancy consultants ISC Services and chairman of the Life Insurance Settlement Association, said within the settlements world providers have begun looking at maturity extension risk in a new light. He's been involved in the industry for 30 years and ran two firms serving as providers linking buyers and sellers in the market.
He said his industry is a “constituent in the concern surrounding that issue” because many of their portfolios still contain earlier policies that could potentially bump up against the terminal age.
For those policies predating the change in life insurance products to include maturity extension provisions, he said even seven to 10 years ago only a few investors were addressing this as an important part of their due diligence and now it's a normal part of the evaluation process on life settlements.
If the person reaches 100 without an extension rider or provision in their policy, settlement investors and providers can lose money on the deal. Likewise, if they anticipate an 85-year-old has a four-year life expectancy that ends up being much longer, the extra premiums they pay could eat into or overtake their investment.
“Most sophisticated investors are acutely aware of extension risk and the possibility that, particularly for a large policy usually owned by a wealthy, well-advised person, is likely to extend due to their access to better health care and by enjoying a better lifestyle,” he said. “So, they factor that into their pricing and their analysis before they would take an age 100 risk and, as a result, the investor will usually require some form of extension rider.”
Conway said he isn't aware of people rushing to sell policies before they hit the terminal age and the issue has primarily impacted those on the buy side of the transactions.
“In theory, if consumers were more aware of life settlements and they were then made aware that your policy doesn't have an extension rider and therefore might be less valuable down the road if you decide to sell it, it might cause certain consumer behavior,” he said. “It might drive a change in agent behavior or in the types of policies being sold.”