Revised mortality table will change tax bite on life policies

New charts allow less money to be used for cash accumulations

Jun 23, 2008 @ 12:01 am

By Darla Mercado

Insurance companies are urging those who sell their universal and variable universal life policies to be mindful of a big change that’s coming Jan. 1.

That’s the date new mortality tables go into effect, changing the way clients build cash value within life insurance policies and potentially increasing the taxes paid on withdrawals.

Internal Revenue Code rules on premium funding are at the heart of the issue. Under those regulations, policyholders can fund their policies only within certain limits. Otherwise, the life insurance contract is classified as a modified endowment contract or a highly funded policy, and may be subject to income and excise taxes on distributions while the holder is alive.

A policy owner can borrow tax-free from a life insurance contract, but the tax rate on a distribution from a modified endowment can be as high as 45%.

The Internal Revenue Service limits on contributions for tax purposes are based on approved mortality tables.

The new standard mortality table was developed in 2001 by the American Academy of Actuaries in Washington and the Society of Actuaries in Schaumburg, Ill. States began adopting it in 2004 after it was approved by the National Association of Insurance Commissioners of Kansas City, Mo.

The 2001 Commissioners Standard Ordinary table assumes a life expectancy of 120 years, in comparison with the 100-year life expectancy in the 1980 mortality table, which it replaced.

“Certainly, some people buy policies for the death benefits and for the tax advantages of accumulating money in cash value,” said Lester Lovier, vice president of life insurance product development at AXA Equitable Life Insurance Co. in New York.

“If you want to fund heavily, you can’t put in as much into a 2001 CSO product for the death benefit,” he said in referring to the tax implications of overfunding.

Insurance carriers have spent four years replacing products that used the current table. Once the revised table goes into effect, new-business sales in all 50 states must be made using the new table.

Policyholders can expect a drop of 3% to 6% in the amount they can use to fund their premiums under the 2001 CSO table without being penalized by the IRS, according to Roland Fawthrop, second vice president and actuary, life product development, for Springfield-based Massachusetts Mutual Life Insurance Co.’s U.S. insurance group.

Required premiums necessary to fund a policy won’t change, but the amount of additional funding a customer can put into the contract in order to help boost cash value will decrease, he said.

“On the cash accumulation side, you’re putting less money into the policy, so your long-term rate of return on the cash value might be [0.1 percentage] points less than it was in the previous year,” Mr. Fawthrop added.

The upcoming table change could have an effect on how the policies are marketed to investors. Policies on these new standards generally will be cheaper for consumers, but those dollars are going toward insurance and not so much toward making money. “You’re getting more protection and somewhat less cash value for the same dollar,” said Donna R. Claire, president of Claire Thinking Inc., an actuarial firm in Fort Salonga, N.Y. and chair of the life risk managemment and financial soundness committe at the American Academy of Actuaries.

This change won’t make the use of the cash value as a selling point obsolete. Rather, advisers and agents will have to retarget the sales pitch for the new products, Mr. Fawthrop said.

“There’s a modest change in focus, but the cash value in permanent life insurance policies is very important,” he noted. “There’s been this shift in the focus of policies from accumulation to death benefits, and you’ll see that in the sales process as well.”

Customers who want more cash value will need a higher face amount, Mr. Fawthrop said.

Some companies, such as New York Life Insurance and Annuity Corp., have released accumulation products that will work with the new tables. The carrier two weeks ago released its variable universal life Accumulator product, which will permit flexible premium payments and tax-free access to cash value as long as the withdrawals are properly structured.

“All carriers in this boat have been mentioning this fact to the producers: If you have accumulation sales out there, make them this year so you can put more money into the policy — don’t wait for the last minute,” Mr. Lovier said.

E-mail Darla Mercado at [email protected]


What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30


Retirement Income Summit

Join arjuna-design at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

arjuna-design editor Frederick P. Gabriel Jr. and reporter Greg Iacurci talk about this week's cover story that looks at whether Fidelity Investments is stepping on the toes of retirement plan advisers.

Video Spotlight

Recommended Video


Latest news & opinion

Is Fidelity competing with retirement plan advisers?

As the Boston-based mutual fund giant expands the products and services it brings to the retirement market, some financial advisers say the firm is encroaching on their turf.

Gun violence hits investment strategies, sparks political debates with advisers

Screening out weapons companies has limited downside.

Social Security underpaid 82% of dually entitled widows and widowers

Agency failed to tell survivors that they could switch to a higher retirement benefit later.

If Finra eases firm oversight of outside business activities, broker-dealers could lose revenue

Brokerage firms would no longer be able to charge reps for supervising nonaffiliated RIAs.

Galvin charges Scottrade with DOL fiduciary rule violations

Action of Massachusetts' top regulator shows states can put teeth into a rule under review by the Trump administration.


Hi! Glad you're here and we hope you like all the great work we do here at arjuna-design. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Last News

best mid cap growth etf price to file taxes at h&r block medicare earnings limit social security and 401k vanguard 500 stock price vanguard growth index fund investor shares franklin templeton global growth banks insured by the fdic social security early retirement income limits social security form 1099 trend projection calculator metlife long term care insurance customer service how to report elder financial abuse american funds international growth and income bank of america credit card referral how to enroll in medicare part b online how does a stock split affect cost basis virtus multi sector short term bond converting a roth ira to a traditional ira top 10 most valuable baseball cards t rowe price health sciences mutual fund can a divorced spouse collect social security jay leno car collection total value dreyfus short term income fund pimco foreign bond fund hedged federated international leaders fund blackrock high yield bond inv a eaton vance floating rate a is social security deduction pre tax chartered financial advisor salary social security earnings record principal 401k hardship withdrawal john hancock customer service mainstay conservative allocation fund