SBLI policy becomes a MEC

[BobHarris]

A client of mine received this letter last week. The policy is barely 9 months old. SBLI can't/won't give me any more info on this .

see the attached letter.


Any thoughts?

 

[Tahoe Ray]

Does it matter?

No dividends, no appreciation, no problem?

 

[scagnt83]

Its pretty easy. The policy has a 7 pay premium, which is the MEC limit.

For some reason, premiums exceeded the 7pay premium.

If the policy did not illustrate as a MEC originally, then something has changed that was not on the illustration. Such as a Withdrawal or Loan. Distributions in the first year can cause issues.

And ditto to Rays comment. Does it matter?

 

[BobHarris]

Maybe I should have clarified this more. This is a FE policy that is 7 months old. The only payments made have been the automatic bank drafts

 

[scagnt83]

Maybe I should have clarified this more. This is a FE policy that is 7 months old. The only payments made have been the automatic bank drafts

Same answer.

Doesnt matter if its par or non-par WL.

It has a 7pay premium, that 7pay premium was exceeded.

That is the technical reason.

Was a sales illustration run for this case? If so, did it indicate the policy would be a MEC at that Premium? If not, then you and the client could have a case to have the MEC undone.

But if the illustrated premium made it a MEC, then the policy was sold as a MEC and the illustration would have indicated MEC status.

Was this a single premium WL that is paid monthly over 12 months?

 

[Life Hawk]

Perhaps an error. 3 way with company and client to understand what they sent out might be in order.

 

[DHK]

I have seen company illustration errors before. It's possible that there was an error at the onset when the original illustration/quote was generated.

Here's the thing: if it's not a policy meant for growth, then it simply turned into more of a wealth transfer policy instead of a protection-based policy.

MECs are treated like an annuity while you are alive and life insurance when you pass. Annuities are treated LIFO - last in, first out as interest is credited. If you do a withdrawal and there's interest, that interest comes out first and it is taxable as ordinary income. But only the interest is taxable, not the principal contribution.

The only things to manage at this point are:
1) Is this what the customer wanted?
2) If not, can we get it adjusted to either refund excess premiums or make the adjustment in the illustration if it was incorrect.
3) If the company won't adjust it, at least it's not like you didn't try. You helped remove some professional liability on your part and now it's the company's issue. Advocate for your customer and go from there.
4) Document everything.

 

[scagnt83]

For the record. MECs are not reported to the IRS. It is an internal classification within the carrier to know how to treat distributions. That means they 100% can reverse it if caused in error.

 

[DHK]

For that matter, even Traditional IRA contributions can be un-done in the same year by the financial institution. As long as taxes weren't filed yet, anything can be undone in the same calendar year.

Since this is a 7-8 month old policy, there's still time. However, I also will never underestimate the stubbornness of insurance companies.

I like what Brandon Green says: "I love life insurance, but I can't stand life insurance companies."

 

[scagnt83]

For that matter, even Traditional IRA contributions can be un-done in the same year by the financial institution. As long as taxes weren't filed yet, anything can be undone in the same calendar year.

Since this is a 7-8 month old policy, there's still time. However, I also will never underestimate the stubbornness of insurance companies.

I like what Brandon Green says: "I love life insurance, but I can't stand life insurance companies."

I had a situation when a UL became a MEC because the client paid the premium 2 weeks too early. It counted as current year and not the coming year, so they had double the premium in a single year.

Because of the 60day window to refund MEC premium, the annual statement that generated 45 days later, did not show the policy as a MEC. (it should have)
So we did not know at policy review what had happened.

Long story short, carrier refunded the premium, allowed it to be applied to the current year, and took away MEC status.

That is a danger of UL over WL... flexible premium makes room for client error that cant happen on a WL.

But that whole episode clued me in to the fact that MEC status is not more than a box checked in their computer system... that can be unchecked just as easily.