Whole life policies have fixed premiums that must be paid. There are a few exceptions. One is when the whole life policy is “paid-up,” meaning the policy is contractually guaranteed to run without any additional premium. This is actually called a reduced paid-up policy and must be requested from the carrier in writing. The death benefit that is “paid-up” will be something less than the current death benefit of the policy, hence “reduced.” Another exception is when the dividend of the policy is sufficient to pay the policy premium and the dividend election selected is reduce premium. Remember that dividends are not guaranteed and even if dividends are sufficient to pay premiums they may drop and out of pocket premium contributions may return. A somewhat related exception is the use of the cash value from paid-up additions to pay ongoing premium. The last exception is the use of an automatic premium loan or APL. Whole life policies have this interesting feature that allows cash values within the policy to be loaned to pay ongoing premium, sort of like moving money from your right pocket to your left.
The APL feature is a "free" feature and in some instances is the default feature, meaning the policy comes without asking for it. But in some instances the feature must be requested at policy application. Some applications have a check box, or other method to request the feature. However, for some carriers it must be written on the application and there is no mention of the feature or the opportunity to receive this benefit anywhere on the application. The agent must know about it and request it.
What happens if you do not have this feature as part of your whole life policy contract? Nothing good. Let’s assume a premium is due and there are no other methods of paying the full premium. The only way to pay the premium would be through an automatic premium loan, but the policy does not have this feature. What now? One of three things:
- The trust could receive only the surrender value of the policy. This will be much less than the death benefit expected.
- The trust could receive only a reduced policy death benefit which will be greater than the surrender value of the policy, but less than the actual policy death benefit.
- The trust would receive the full death benefit, but only for a shortened period of time, not for the insured's life time. A term policy for a specific period of time.
It is possible that you may be able to reinstate the policy to its full death benefit. This is done by paying the back premium, loan and interest due. However, in addition, the insured may have to answer health questions and if the health of the insured has negatively changed you may not be able to reinstate the policy to the full death benefit for life….you have some real liability issues.
How do you mitigate this liability? A proactive approach is best. Contact all whole life policy carriers in your portfolio with a letter that asks if this feature is part of the policy and state that if not, you would like to have it made a part of the policy. Provide some sort of follow up mechanism (a return sheet, for example) and make sure that your staff follows up on every policy.
We just completed an APL project on all ITM managed policies to confirm the feature was in force on all whole life policies, so if ITM is managing your whole life policies this will not be an issue. If we are not managing your policies we suggest you contact all of the whole life carriers in your portfolio as soon as possible.