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Permanent Life Insurance

Permanent Life Insurance and Genetic Testing Insurability

| By Matthew Snider

I thought I’d revisit a topic that I believe was touched on earlier in the year regarding changes in the life insurance industry as well as revisiting a situation that arose pertaining to insurability. 

The Impact on Permanent Life Insurance

At the end of 2020, the Consolidated Appropriations Act was signed into law. Within the act was a change to Internal Revenue Code Section 7702, established back in 1984. Section 7702 limits the amount of cash value permitted in a life insurance policy at any given time relative to the death benefit. The tax code governs how much money can accumulate inside a life insurance policy without triggering taxability.

Life insurance policies that exceed the federal tax law limits are considered Modified Endowment Contracts (MECs), and while the death benefits are not subject to taxation, that is not the case with cash withdrawals. These withdrawals would be treated comparably to most non-qualified annuities with gains within the contract being taxable.  

Previously, however, Section 7702 required a 4% guaranteed interest rate on the cash value. Since interest rates have been low for a long time now, and this guarantee was considerably higher than the current market, it became an issue for the insurance industry. So the industry lobbied Congress to change Section 7702 and were successful.  

This part of the code has been replaced with a rate tied to an index. Going forward, Section 7702 requires guaranteed cash values be calculated with an interest rate of no less than 2% and no more than 3.75%. If rates eventually move higher, these limits can also be adjusted.  

What Does This Mean?  

The reduction in the guaranteed interest rate will impact pricing and accumulation of cash value in permanent life policies. The cost or premiums for a guaranteed face amount will move higher, while the guaranteed cash value as a proportion of the total premium is reduced. 

Life insurers say the change allows for more flexibility in product design. Depending on the owner’s reason for purchasing life insurance, there may be a product that is even better suited to address that goal going forward. This could be particularly true if you are looking at life insurance for more than just the death benefit.  

It also means that if you were looking at permanent life insurance for yourself, there is an opportunity to secure the 4% guarantee and 2021 pricing if you do it before the end of October. Consequently, there is a small window to lock in if you or someone you know needs permanent life insurance before that opportunity goes away.

Securing Permanent Life Insurance for Children

On the topic of life insurance for someone other than yourself, I want to share a fairly recent experience that arose relating to insurability concerns. 

A client had been approached by his doctor to get a genetic test due to a reoccurring health issue within the family history. While the individual wasn’t exhibiting any health issues, the doctor was proactive in trying to determine if this individual possessed a genetic mutation that would make him susceptible to developing this condition in the future. The individual moved forward with the genetic testing and the results came back positive for the genetic mutation.  

How does this tie into life insurance? Well, unlike health insurance, genetic testing results can be utilized as part of the underwriting process for life, disability and long-term care insurance. One state, Florida, enacted a genetic privacy law that prohibits life insurance companies from discriminating based on genetic test results, but outside of Florida there is no federal law that limits the use of genetic information by life insurance companies.  

Since this individual lives in Pennsylvania, and the genetic test was ordered by a doctor, the results became part of his medical record and would be reviewed as part of the underwriting process. The insurer can subsequently look at this information and either charge a higher premium for the risk they are taking on or deny coverage. 

We Kept Digging

After working with our insurance department, it was thought that this positive result from the genetic test would make this individual uninsurable. This wasn’t really an issue, at least as it pertained to life insurance for the client who had adequate insurance, but then the focus shifted to his school-aged children. 

It had been suggested that since his result had come back positive that he should have his children screened. Knowing that a positive result could potentially make them uninsurable, we began to look at securing life insurance coverage for the children.  

Not knowing their future need for insurance, we were able to look at permanent life insurance policies that would allow for an increase in death benefits, periodically, over their lives since their need will adjust based on life-changing events like marriage, having more children, purchasing a home and so on. 

We knew there were a number of insurers that have these types of policies and that’s what this individual secured for his children. Given the advancements in genetics, this may now become a more common situation going forward.

So, in light of this change to Section 7702, and the opportunity available to you only through October, it makes a lot of sense to act quickly if your situation requires you to secure coverage on yourself or someone else while you can. We would be happy to help you.

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