Premium Guideline Violations?

newbyagent

Expert
37
Very, very new independent multi line agent here so I apologize for the ignorant question. I've just inherited a client with a 200k UL policy. The policy is 20 years old. The policy owner is currently paying aprox. $12k per year for the policy. The carrier provided an in force illustration showing the policy changing in year 21, to a Plan B w/increasing face and premiums are illustrated at about a level $20k per year.

The insured got a notice from the carrier recently saying that the cost of insurance will be about $13k next year, about 13.5K the following year, etc.. A gradual increase in COI each year.

However, in the guaranteed column of the illustration that (shows plan B) year 22 and on lists a premium of $20k and 2 asterisks. The asterisks denote "The payments shown are not sufficient to keep the policy in force under these assumptions".

So my question is this; How can the carrier say the COI is so low, but the illustration show a much higher premium that are "not sufficient to keep the policy in force"?

When I asked the carrier rep if the COI amount would be enough for the policy to stay in force, he said "yes, but the policy is going to run into some premium guideline violations". He also said that the policy could not illustrated with a level premium, it had to be shown with the option B.....

Can someone please help me make sense on what is going on with this policy? It seems like I have conflicting information.

1) What is the policy owner going to have to pay?
2) What is a "premium guideline violation"?
3) Why would the illustrated option b premium "not be sufficient to keep the policy in force when it is well above the carrier's reported COI"?

Any help you can offer would be a life saver. Thanks!
 
A 20-year old policy was sold in 1990, the last part of the "old UL" era. Lots of those are imploding these days.

Are you sure the rep didn't say "guideline premium violation?" This article can shed some light on GPT, CVAT, and life insurance corridors:

Tax Considerations for Life Insurance - Financial Web

Basically, the rep was saying that the client's between a rock and a hard place - if he pays enough to keep the policy in force, then he'll violate the guideline premium test and the policy won't be life insurance anymore (it'll become a MEC). If he doesn't, then the policy will likely lapse.

That above paragraph is guesswork, though, without getting to see the illustration. If the policy has any CV left, and the client is healthy, you should consider a 1035 rescue. If you can black out the client's information and post the in-force illustration here, or email it to me, I'd be happy to take a closer look.
 
Thank you very much for the information. I really appreciate it. I am pretty sure you are right about the "guideline premium violation" phrase and I misquoted the rep. It is bewildering that the policy is going to implode when the owners haven't been overfunding it. Why is this happening to so many UL policies now? When many were written after the MEC laws in 1988 (like this policy above) and should have conceivably been structured in accordance with those laws?

I would love to have you look at the illustration and will work on getting you a copy.

Thanks again.

A 20-year old policy was sold in 1990, the last part of the "old UL" era. Lots of those are imploding these days.

Are you sure the rep didn't say "guideline premium violation?" This article can shed some light on GPT, CVAT, and life insurance corridors:



Basically, the rep was saying that the client's between a rock and a hard place - if he pays enough to keep the policy in force, then he'll violate the guideline premium test and the policy won't be life insurance anymore (it'll become a MEC). If he doesn't, then the policy will likely lapse.

That above paragraph is guesswork, though, without getting to see the illustration. If the policy has any CV left, and the client is healthy, you should consider a 1035 rescue. If you can black out the client's information and post the in-force illustration here, or email it to me, I'd be happy to take a closer look.
 
Bet there is a webinar some where that could help.



A 20-year old policy was sold in 1990, the last part of the "old UL" era. Lots of those are imploding these days.

Are you sure the rep didn't say "guideline premium violation?" This article can shed some light on GPT, CVAT, and life insurance corridors:

Tax Considerations for Life Insurance - Financial Web

Basically, the rep was saying that the client's between a rock and a hard place - if he pays enough to keep the policy in force, then he'll violate the guideline premium test and the policy won't be life insurance anymore (it'll become a MEC). If he doesn't, then the policy will likely lapse.

That above paragraph is guesswork, though, without getting to see the illustration. If the policy has any CV left, and the client is healthy, you should consider a 1035 rescue. If you can black out the client's information and post the in-force illustration here, or email it to me, I'd be happy to take a closer look.
 
Hold on there's an important distinction to be made here between becoming a MEC (failing the 7 pay test) and failing the test for insurance and be reclassified (this is where GPT and CVAT come in).

Failing 7 pay (a max amount that can be paid into the policy over a period of 7 years which resets everytime there is a material change to the policy) turns the policy into a Modified Endowment Contract, which creates LIFO distributions and taxable loans but still provides tax deferred growth and tax free death benefit.

Failing the test for insurance (either CVAT or GPT, whichever was chosen at issue if there was a choice) means the contract is not longer classified as a type of life insurance. Not only to are distributions based on LIFO and loans taxable, but tax deferred savings goes away and at death a few things take place. First, the cost basis for the policy must be determined, and then total account value is deducted from the db. The portion that represents growth in savings is taxable, while the diference (the "death benefit" is received tax free).

For the sake of trying to be additionally clear:

Total Payout = A

Cash Value = B

Cost Basis = C

B - C = D (growth in savings)

A - B = E "Death Benefit"

At death the total benefit is broken up as follows:

Beneficiary receives what is the total benefit amount, but

Part E is not taxable

Part C is not taxable

But

Part D is taxable

There's also rules about taxes due on the groth part of the savings the year the policy fails the test for life insurance, but I can't remember them right now, and I'm about to leave the house (I'll go find the Kugler book later).

In other words, failing the test for insurance can be a major PITA, that the client should attempt to avoid.

Increasing db, is a common practice to avoid this problem, but the client will have to contend with increasing insurance costs, this is life dealing with UL.
 
A 20-year old policy was sold in 1990, the last part of the "old UL" era. Lots of those are imploding these days.

Are you sure the rep didn't say "guideline premium violation?" This article can shed some light on GPT, CVAT, and life insurance corridors:

Basically, the rep was saying that the client's between a rock and a hard place - if he pays enough to keep the policy in force, then he'll violate the guideline premium test and the policy won't be life insurance anymore (it'll become a MEC). If he doesn't, then the policy will likely lapse.

That above paragraph is guesswork, though, without getting to see the illustration. If the policy has any CV left, and the client is healthy, you should consider a 1035 rescue. If you can black out the client's information and post the in-force illustration here, or email it to me, I'd be happy to take a closer look.


I tried to send a PM to ask for your email address so I can forward an illustration, but got an error message that said I am too new. At your convenience, do you mind PMing me with the best email address to send an illustration to? Thanks!
 
However, in the guaranteed column of the illustration that (shows plan B) year 22 and on lists a premium of $20k and 2 asterisks. The asterisks denote "The payments shown are not sufficient to keep the policy in force under these assumptions".

You are looking at the wrong column, look at the current assumption column. They should be showing you a level premium to keep the policy in force under current assumptions.

If they had to go to increasing DB to pass GPT, then it should be relatively full of cash and fine under current assumptions.

That said, I have someone in a similar situation. It is an old UL from Travelers, and there isn't enough cash to keep the policy going, but because of GPT, the client can't put enough in to keep it going. Apparently there is an out, MetLife indicated that he would be allowed to pay the COI once the required premium would violate the GPT. They suggested that it would still be insurance.

Obviously, I plan to replace the policy long before them, as the premium will be sky high. It is always fun having to come in behind someone and clean up their mess.
 
>> It is always fun having to come in behind someone and clean up their mess.

And profitable. :yes:

You are looking at the wrong column, look at the current assumption column. They should be showing you a level premium to keep the policy in force under current assumptions.

If they had to go to increasing DB to pass GPT, then it should be relatively full of cash and fine under current assumptions.

That said, I have someone in a similar situation. It is an old UL from Travelers, and there isn't enough cash to keep the policy going, but because of GPT, the client can't put enough in to keep it going. Apparently there is an out, MetLife indicated that he would be allowed to pay the COI once the required premium would violate the GPT. They suggested that it would still be insurance.

Obviously, I plan to replace the policy long before them, as the premium will be sky high. It is always fun having to come in behind someone and clean up their mess.
 
You are looking at the wrong column, look at the current assumption column. They should be showing you a level premium to keep the policy in force under current assumptions.

If they had to go to increasing DB to pass GPT, then it should be relatively full of cash and fine under current assumptions.

That said, I have someone in a similar situation. It is an old UL from Travelers, and there isn't enough cash to keep the policy going, but because of GPT, the client can't put enough in to keep it going. Apparently there is an out, MetLife indicated that he would be allowed to pay the COI once the required premium would violate the GPT. They suggested that it would still be insurance.

Obviously, I plan to replace the policy long before them, as the premium will be sky high. It is always fun having to come in behind someone and clean up their mess.

Of the two columns, guaranteed and projected, I was using the guaranteed because the policy may or may not perform (@ the carrier's interest rate) as the projected numbers illustrate .... I focused on the guaranteed since that is worst case scenario? Is that the wrong way to think of it? Why would a guaranteed column say that the premiums are not enough to keep the policy in force, when the projected column illustrates the policy in force with the same premiums?

The projected column does show a level premium (as does the guaranteed), increasing DB and a nice build up of cash value starting with the new higher [option b] premiums. However, the policy currently has $0 CV. So I am wondering if this is a similar situation to what you described?

I asked for an illustration that showed a level DB and was told by the carrier that they couldn't illustrate the policy that way (presumably for guideline premium violations?)

What about selling this policy in a life settlement and getting them a new one?

Look forward to everyone's thoughts. Thanks!
 
Last edited:
Back
Top