What the heck am I talking about?  Guidance from the IRS regarding the treatment of

life insurance policies that mature at age 121 versus 100.  Still wondering what I am talking about?  Proves my point about the time bomb you never knew about.

Here's the background:

We all know that up until a few years ago, life insurance policies all matured at age 100.  The treatment of those policies could vary a bit, but it really boiled down to one of three options:

• Thanks for playing!  It's been a pleasure insuring you all these years.  Here's your cash value.  If there is gain in the contract it is taxable, and the check is made out to the policy owner.  Probably not the intent of the policy owner to say the least!
• Thanks for playing!  It's been a pleasure insuring you all these years.  Rather than pay out your cash value today, it is now the face amount of the contract and we will pay it to your beneficiary at your death.  We will even waive any insurance charges going forward.  Never mind that the policy was for $1,000,000 and the cash value is $20,000.  Aren't we nice?
• Thanks for playing!  It's been a pleasure insuring you all these years.  We will continue your coverage at the current face amount for the remainder of your life with no additional charges.  No longer are you penalized for living too long.

Most recently issued policies used this last option until the 2001 mortality table was introduced, defining policy maturity at age 121.  Carriers have now moved to this table for all of their products, and any discussion of what happens beyond maturity at age 121 is pure fantasy from my perspective, but the little question of what happens between age 100 and 121 raised its potentially ugly head. 

The rest of that story can be found here in an announcement from John Hancock about the guidance issued by the IRS.  The primary issue was MEC/Definition of Life Insurance compliance.  Theoretically, premiums paid beyond age 100 could cause a violation of these rules, even if the policy required these premium payments to remain in force.  The bottom line from the IRS is that any policy that matures at age 121 will be treated as if it matures at age 100 for MEC/Definition of Life Insurance testing.

I will leave you with one additional thought today, and that is this:  Some of our carriers took what I consider to be a bit of a reactionary response to the perceived ambiguity created by the transition to the new mortality table.  Some went as far as to restrict internal exchanges and the like from 1980 CSO products to 2001 CSO products.  I thought at the time that the extension of maturity to age 121 causing rules violations was utter nonsense.  I still think that.  Luckily the IRS injected some common sense in to the conversation for once, and the ticking I have heard for the last few years has finally stopped.  Perhaps now the life insurance carriers will stop restricting the policy owner's ability to effectively manage their life insurance policies.

Have a great weekend.