Happy 100th Birthday! There Goes Your Life Insurance
August 8, 2017 by Leslie Scism
When Gary Lebbin turns 100 years old in September, hanging over any celebration will be one very costly fact: His life insurer aims to cancel two policies totaling $3.2 million in death benefits.
The Lebbin family has run up against a provision that exists in many life-insurance policies. Policies have expiration dates, and the one in the Lebbin family’s two contracts is age 100 for the policyholder.
It is a standard feature of permanent life insurance, a product combining a tax-deferred savings component with a tax-free death-benefit. The provision calls for the termination of the death benefit and payout of all of the built-up savings when the policyholder reaches the specified age.
The limits weren’t an issue in the many decades when very few people lived beyond 100. But they increasingly are a problem for the U.S. life-insurance industry as more people become centenarians. There were an estimated 53,364 centenarians in the U.S. as of 2010, up from 37,306 in 1990 and 32,194 in 1980, according to a U.S. Census report published in December 2012.
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Since the mid- to late-2000s, the industry has used age 121 as the standard maturity date in new contracts. But an unknown number of older contracts with the 100-year-old limit remain in consumers’ hands. Some insurers previously offered older policyholders the opportunity to extend the age in their older policies with varying financial terms.
The Lebbin family’s insurer, a unit of Transamerica Corp., didn’t offer an extension.
Lawrence Rybka, president of insurance brokerage Valmark Financial Group in Akron, Ohio, worries many people may unexpectedly lose out. At least seven people have recently contacted his firm with questions about older policies with maturity dates of 95 to 100 years. “Contract language of this type was common practice,” he said.
Faced with the potential loss of coverage, Mr. Lebbin’s family filed suit in federal court in Maryland earlier this month, accusing Transamerica of knowingly using a too-low age at the time of sale in the early 1990s. The suit also alleges the insurer improperly marketed the policies as “coverage for life.”
The federal-court lawsuit says the Lebbins paid Transamerica more than $1.5 million in premiums over the years. It seeks revision of the contracts to allow coverage until Mr. Lebbin’s death. It also seeks an award including punitive and other damages.
In a statement, Transamerica, a unit of the Netherlands’s Aegon NV, says it acted properly.
“We understand that Mr. Lebbin is disappointed that his life insurance coverage will shortly come to an end. However, his policies, according to their terms, pay benefits only if he were to pass away before the policies’ anniversaries nearest age 100…We take seriously our obligations to the millions of customers who rely on the solutions we provide and we abide fully by the terms and conditions of our policy contracts,” according to the statement.
In terminating the policy, Transamerica said it would pay Mr. Lebbin the built-up “net cash value,” or savings. That is as per contractual terms.
It is unclear how much cash value there is, said James Bainbridge, a lawyer for the family. Industrywide, many of these policies have performed poorly in recent years because interest buildup is tied to the insurers’ bond investments, and low interest rates have had a punishing effect. Upon termination of the policies, the Lebbin family would collect less money and potentially pay taxes, while a future $3.2 million death benefit would be tax-free, Mr. Bainbridge said.
“Transamerica has a public-relations problem because it didn’t think ahead and offer policyholders like these” options at an earlier stage to deal with the looming age issue, said Todd Erkis, a former chief actuary at Lincoln National Corp. and a visiting professor at St. Joseph’s University.
Ironically, policy maturity dates were born as a way to help consumers get a reasonable value out of a policy after years of ownership but before a death, said Paul Graham, a senior actuary with the American Council of Life Insurers. To calculate monetary values and set annual premium levels, “you have to have an end point,” he said.
By the mid 2000s, a new mortality table was available that established 121 as the new maturity age to help prevent an abundance of policies maturing before death, according to Mr. Graham.
“The agents didn’t want the policies maturing before people were dying, the companies didn’t want it happening, and policyholders didn’t want it happening,” he said.
The policies taken out by the Lebbins are called universal life. They are a popular form of permanent life insurance. Permanent life stands in contrast to basic “term” life, which is sold to provide a payout if a death occurs within a specified period of time, usually 10 to 30 years.
The suit alleges Transamerica marketed the policies as coverage that would insure the Lebbins for life and would guarantee they would have tax-free income with which their heirs could pay estate taxes. The lawsuit maintains that Transamerica established the maturity date with a 1980 mortality table “despite the fact that it was outdated and not an accurate reflection of the actual life expectancies of its customers.”
The Lebbins became aware last year of Transamerica’s intention to terminate the policies and unsuccessfully sought an extension of the contracts until Mr. Lebbin’s death, the lawsuit says.
Mr. Lebbin was born on Sept. 6, 1917, in Berlin. He came to the U.S. in 1938 to escape Nazi persecution, according to his son-in-law Phillip Spector. From arriving penniless, he founded a paint-manufacturing business in the 1940s and ultimately had more than 50 retail outlets in the Baltimore-Washington area.
He married in 1944. Bernice Lebbin died in 2015.
“Centenarians are cherished and routinely honored by local communities and governments,” said Mr. Bainbridge, the lawyer. “Centenarians, however, are problematic for the life-insurance industry.”
Write to Leslie Scism at leslie.scism@wsj.com
Appeared in the July 21, 2017, print edition as ‘This Life Insurance Isn’t So Permanent.’
