Articles Tagged with: life insurance information
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Life Insurance Retained Asset Accounts Explained

Life Insurance Retained Asset Accounts Explained

Retained Asset Accounts, also known as RAAs, are tools created by life insurance companies as an alternative to paying out a lump sum.  You can think of an RAA as a pseudo bank account: the proceeds that would have normally been paid out are deposited in the insurance company’s corporate account, and you can access their funds via writing a check.

The Dangers of RAAs

Many policyholders have experienced difficulties with RAAs.  When they attempted to draft money from their account, they suffered significant delays.  

An RAA is not like a traditional bank account because the account actually belongs to the insurance company.  They are earning interest from your insurance proceeds that are deposited in their corporate account.

What Your Insurance Company Gains From RAAs

Some insurance companies make the RAA option seem more attractive by offering the policy holder a percentage of the interest that they earn.  While this is indeed an attractive benefit, there is significant concern surrounding which vendors do not accept RAA checks, as well as the general safety of the money that is deposited.  

Traditional banks are insured by the Federal Deposit Insurance Corporation, or FDIC. Your bank account is insured up to $250,000.

RAAs, on the other hand, are not insured by the FDIC. If the insurance company issuing the policy is not in good financial health and do not have the funds to distribute later on, there is no entity to pay you the money you are owed.

Recent Developments on RAAs

In a recent case, Huffman, individually and on behalf of a class, v. The Prudential Insurance Company of America, 2017 WL 6055225 (E.D. Pa. 2017), the Eastern District of Pennsylvania decided that The Prudential Insurance Company of America violated ERISA, a body of federal law, by depositing life insurance proceeds into RAAs.  This means that Prudential, along with other insurance companies that operate in Pennsylvania, will no longer be able to use them as the default method of paying out benefits.

States Differ In Treatment of RAAs

Because the insurance industry is regulated on a state level, the treatment of RAAs after the Huffman case will still have variations.

For example, while Florida allows the use of RAAs though Fla. Stat. Ann. § 627.473[1], Indiana has no explicit statutes or regulations that allows or disallows for RAAs.  Florida’s statute reads as follows:

“Any life insurer shall have the power to hold under agreement the proceeds of any policy issued by it, upon such terms and restrictions as to revocation by the policyholder and control by the beneficiaries and with such exemptions from the claims of creditors of beneficiaries other than the policyholder as set forth in the policy or as agreed to in writing by the insurer and the policyholder. Upon maturity of a policy, in the event the policyholder has made no such agreement, the insurer shall have the power to hold the proceeds of the policy under an agreement with the beneficiaries. The insurer shall not be required to segregate the funds so held but may hold them as part of its general assets.”

It is likely that Huffman will influence more states to address the validity and legality of various aspects of RAAs.

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Financial ramifications of a loved one’s death

Coping with the death of a loved one can be an emotionally taxing experience. While finances may be the last thing on your mind, understanding the basics of estates, trusts, and life insurance can help to navigate these complex processes when the time comes.

Estates

A deceased individual’s estate is the sum total of his or her assets, i.e. all the property that he or she owned at death. This can take the form of real estate, bank accounts, automobiles, stocks, insurance policies, or virtually anything else of financial value.

Estates are distributed through a process called probate. Probate frequently involves the use of the deceased’s will. The executor, often a trusted friend or family member of the deceased, oversees the distribution process according to the terms of the will. The executor acts as a sort of middleman in between the deceased person and the  beneficiaries, often spouses, children, or relatives of the deceased, who are each entitled to a portion of the estate.

In the case of high-value estates, probate may become a heavily litigated process, with multiple parties claiming to be entitled to the same assets. It’s also important to note that the probate court process varies on a state-by-state basis. For instance, many states allow people with few or no assets to avoid probate (see Cal Prob Code § 13100).

Trusts

A trust is an independent financial entity created when an individual (the “grantor”) puts money or assets aside to be managed, invested, and distributed by a trustee. Trusts may assign an individual or an asset management company (AMC) as trustee, and they may afford varying levels of discretion to the trustee. Some trusts specify that the trustee can distribute funds “as needed,” while others specify restricted uses or amounts at specific time intervals (see the “Spendthrift trusts” section of our previous blog post).

Because trusts are not technically “owned” by anyone, they are not counted as part of the grantor’s estate. In high-value estates (only those with values over $11.18 million as of recent tax changes), placing assets into a trust can help to minimize federal estate taxes (see our previous blog post). Trusts are also typically distributed at the discretion of the trustee, avoiding the probate process altogether.

Life insurance

In most cases, life insurance is not treated as part of the deceased’s estate or as a form of trust, but as a separate fund altogether (see our previous blog posts on probate and trusts for exceptions). With life insurance policies, the beneficiary must file a claim with the insurance company before being paid the death benefit. This typically involves 3 steps (see our previous blog post):

  • Step 1: Gather all relevant information about the policy by looking through the deceased’s records, bank statements, taxes, etc.
  • Step 2: Contact the insurance company and let them know of the insured’s death
  • Step 3: Fill out claim forms and send a certified copy of the insured’s death certificate

After completing these steps, you should be paid within 2 months. However, life insurance companies will frequently delay or deny legitimate claims in order to maximize their own profits. If you believe your claim has been unlawfully delayed or denied, don’t hesitate to contact an experienced life insurance lawyer.

Life insurance lawyers

What is a life insurance trust?

A trust is a financial entity created when an individual puts money or assets aside to be managed, invested, and distributed by a trustee. Trusts may assign an individual or an asset management company (AMC) as trustee, to which the terms of the trust may afford varying levels of discretion. Some trusts specify that the trustee can distribute funds “as needed,” while others specify restricted uses or amounts at specific time intervals (see the “Spendthrift trusts” section of our previous blog post).

Life insurance policies are typically “owned” by the policyholder, i.e. the person who applies for and pays premiums on the policy. Life insurance trusts are created when ownership of a policy is transferred from the policyholder to a trustee. Upon the insured’s death, the death benefit will be paid to the trustee and distributed to the beneficiary or beneficiaries by the trustee.

Why use a life insurance trust?

Although life insurance trusts do not typically offer advantages over personally-owned policies to the average consumer, there are a few situations in which creating a life insurance trust may be prudent.

Estate taxes

Although recent tax changes more than doubled the exemption threshold for federal estate taxes, estates worth over $11.18 million are still subject to a 40% tax rate. If the death benefit is transferred to the insured’s estate following his or her death (see our previous blog post), it may be subject to estate taxes. However, if the policy was owned by a trustee as part of a trust, it will escape taxation on the insured’s estate since it is not technically “owned” by the insured.

Control over distribution of death benefit

In a typical life insurance policy, the death benefit is transferred from the insurance company directly to the beneficiary or beneficiaries upon the insured’s death. However, life insurance trusts may afford full discretion over distribution of the death benefit to a family member or close friend as trustee, allowing them to control who gets what and when. This can be useful when children or financially irresponsible adults, who could not be trusted with the full death benefit, are named as beneficiaries to the trust. Additionally, since the trustee (rather than the beneficiary) controls the death benefit, it is protected from the beneficiary’s creditors.

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Life insurance policies: converting term life to whole life

Term life insurance policies are temporary and provide coverage for a specified period of time. Term life policies are simple: the policyholder pays regular premiums in exchange for a death benefit in the event of the insured’s death. There is no accumulated cash value, and premiums stay constant throughout the duration of the term.

If the expired term life policy included a conversion provision or rider, the policyholder can choose to convert the temporary term life policy into a whole life policy. In contrast to term life policies, which provide coverage up until the end of the term, whole life policies provide coverage for the entirety of the insured’s life or until a designated age such as 65, 75, or 100 years old. Whole life policies also accrue permanent cash value in addition to the death benefit. Since they are more valuable than term life policies, whole life policies often require substantially higher premiums.

Converting a term life policy to a whole life policy is often a simple process, and it can be beneficial on multiple levels. Conversion riders rarely require that the insured undergo a new medical exam or complete a new health questionnaire, which can be valuable if the insured developed a serious medical condition during the time that he or she was covered by the term life policy. Additionally, whole life policies specify future premium rates that are not subject to change. Even if the insured develops a terminal illness, he or she will still only need to pay the premiums listed on the policy.

However, conversion is not always the best option. Factors such as age, financial security, and health are all relevant and should be considered before converting to a whole life policy. For instance, if you are in good health and interested in taking out whole life insurance, it might be best to apply for a new policy altogether. Elderly individuals who only need to secure coverage for the next five or ten years may find that term life better meets their needs. Still, if you are happy with your current term life insurance and wish to make it permanent, conversion can be a worthwhile option.

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How do life insurance payouts work?

If you’re the beneficiary of a life insurance policy on someone who recently passed away, you may be wondering how the payout process works. What’s the typical time frame? What’s the usual procedure for processing claims? What do you need to do?

Step 1: Gather information

The first step in claiming your loved one’s death benefit is to look through their records for information on the policy. It’s helpful to have a complete copy of the policy when filing your claim, but this is not entirely necessary. Bank statements, updates from the insurance company via mail, and tax documents can all help you gather information about the policy. Employers may also have documentation on any group life insurance policies that were purchased as part of an employee benefit plan. If nothing else, you should at least know which insurance company to contact.

If you’re not sure whether your loved one had life insurance to begin with, there are several options available (see our previous blog post). For instance, the National Association of Insurance Commissioners (NAIC) runs a “Policy Locator Service” in which the NAIC will contact insurance companies on your behalf. You can also pay private companies such as Policy Inspector to speak directly with insurers and search for a missing policy.

Step 2: Contact the life insurance company

The next step is to contact the insurance company directly and let them know that the insured has passed away. In order to locate the policy, they will need the insured’s date of birth and social security number, and/or the policy number. They will then send you claim forms and tell you which documents they need to have before processing your claim. If the policy is through an employer, contact the employer’s human resources or benefits department with the information instead of contacting the insurer.

Step 3: Fill out claim forms

The sooner you fill out the claim forms, the sooner the insurance company can process the claim. If you need the death benefit as soon as possible, you’ll want to fill out claim forms shortly after receiving them. Each insurance company has its own process for claimants, but you will always be required to send a copy of the insured’s death certificate. Insurance companies typically accept claim forms by mail or through an agent, but some also allow claims to be filed online.

Step 4: Wait for a response

Each state has its own rules for when life insurance companies need to pay their claimants. For instance, SC Code § 38-63-80 dictates that if an insurer hasn’t processed a claim within 30 days of submission of claim forms, the insurer will also have to pay interest on the death benefit. Although it doesn’t provide a strict deadline, this statute incentivizes insurance companies to pay within the initial 30-day period. Generally speaking, your claim should be processed and your benefit paid within 1-2 months after submitting claim forms. Some companies say it takes as little as 10-14 days for the average, uncontestable claim.

If your claim is approved, the insurance company will typically provide multiple options for payment. You may elect to receive the benefits all at once in a lump sum payment, or to distribute them out over time through annuities. Using an annuity system can allow the policy to collect interest, but this interest is generally taxable. A notable exception occurs on policies with spendthrift provisions, in which the insurer holds onto the benefit and distributes it via prespecified installments (see our previous blog post).

However, life insurance companies may attempt to find reasons to delay or deny your claim (see our previous blog post). This is especially common when the policy was purchased within the past 2 years. During this period, errors, misrepresentations, or omissions can void the life insurance policy altogether, and suicide is generally not covered. Within this period, insurers will frequently delay claims in order to conduct a thorough investigation of the insured’s medical records. Even outside of this two-year window, life insurance companies may deny your claim due to nonpayment of premiums (see our previous blog post) or for violations of arbitrary, overly specific provisions on the policy. If your claim has been unjustly delayed or denied, it’s prudent to contact an experienced life insurance lawyer for a free consultation.

If you or someone you know is struggling with thoughts of suicide, call the National Suicide Prevention Hotline at 1-800-273-8255 to access their national network of local crisis centers that provide free and confidential emotional support to people in suicidal crisis or emotional distress 24 hours a day, 7 days a week.

father and child playing the guitar

When must an insurable interest exist for a life insurance contract to be valid?

When someone purchases life insurance, he or she must have an “insurable interest” in the insured. This means that the policyholder, i.e. the person who owns the policy and names the beneficiary or beneficiaries, will suffer financial loss if the insured dies unexpectedly. It is important to remember that this sort of relationship only needs to exist between the policyholder and the insured, not the beneficiary. Beneficiaries are not required to have any insurable interest in the insured.

There are many situations in which an insurable interest exists, including:

  • A spouse or family member
  • A financially dependent ex-spouse
  • An employer or business partner (if designated as “key personnel”)
  • A creditor

In each of these examples, the policyholder is financially or emotionally “interested” in the well-being of the insured. If insurable interest were not a requirement for taking out life insurance, strangers could essentially gamble on the lives of others. A policyholder without substantial interest in the life of the insured would be incentivized to cause harm and profit from an early death benefit.

When Must An Insurable Interest Exist in a Life Insurance Policy?

An insurable interest must exist and is a non-negotiable requirement for any form of any insurance, including life insurance. If there is an insufficient insurable interest between the policyholder and the insured, the policy is voided. The legal precedent for insurable interest was solidified in Warnock v. Davis, in which the Supreme Court of the United States asserted that a life insurance policy without insurable interest constitutes a “wager” against the life of the insured. (Warnock v. Davis, 104 U.S. 775)

Many state statutes also include provisions explicitly outlining what constitutes an “insurable interest.” For instance, California Insurance Code § 10110.1 defines insurable interest as “a reasonable expectation of pecuniary advantage through the continued life, health, or bodily safety” of the insured, “or a substantial interest engendered by love and affection in … individuals closely related by blood or law.”

Many investors try to find loopholes to avoid the need for an insurable interest in the insured. They do this by arranging with an individual to pay all the premiums on the individual’s policy on himself or herself with the understanding that, after a few years, the investor will obtain ownership of the policy. This evades the need for an insurable interest because insurable interests are evaluated at the time of the original purchase. Courts are not consistent in deciding whether these policies are legal.

Know that in any case, the insured must know of and give their consent to someone purchasing life insurance coverage for them. Forging a signature on a life insurance policy is always illegal.

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How to Find a Life Insurance Policy After Death

Life Insurance Companies May Not Contact Beneficiaries

After facing a loved one’s death, life insurance can help provide necessary financial security to pay for funeral expenses and supplement lost income. In most cases, when someone takes out life insurance, he or she lets the named beneficiaries (often family members of the insured) know about it. That way, when the policyholder dies, the beneficiary or beneficiaries will know to file a claim with the life insurance company.

However, policyholders often neglect to discuss their policies with family members. Although the subject may be difficult or personal, failing to let family members know about your life insurance policy can prevent them from obtaining benefits.

In many states, insurance companies are not required to contact the beneficiaries in the event of the policyholder’s death. If your beneficiaries don’t know about the death benefit, then your policy might end up lost and unclaimed. This can create a problem for beneficiaries. How can they find out whether their loved one took out a life insurance policy?

Keep a Copy Of The Death Certificate

To make the process of claiming the death benefit easier, you’ll want to obtain a copy of the death certificate. The local county in which the person passed or the mortuary that managed their funeral will usually have paperwork. This document will provide the life insurance company with the necessary information like the date of the passing and cause of death.

Steps To Uncover a Life Insurance Policy

Looking Through Your Loved One’s Documents

The first step in finding out whether your deceased loved one had a life insurance policy is to look through their records. For instance, bank statements may record monthly premium payments, or the deceased might have received updates from the life insurance company by mail.

Searching through mail, bank statements, contact lists, taxes, etc. can shed light on whether your loved one had life insurance. Additionally, if the deceased had a lawyer, accountant, or close friend oversee his or her finances, there’s a good chance that they would know about any life insurance policies.

Looking Through a Loved One’s Digital Documents

With password encryption, it can be difficult to uncover a file on a computer or hard drive. If the file is located on a server you may be able to contact the email service or cloud storage company with proof of death.

If you do gain access to your loved one’s computer or phone, check their email for the insurer’s name. You can also try checking their cloud storage for records from the life insurance company.    

Check Insurance Databases To Verify a Loved One’s Records

The National Association of Insurance Commissioners (NAIC) maintains a list of state-by-state insurance departments which may keep records of your loved one’s life insurance. They also run a “Policy Locator Service” in which the NAIC will contact insurance companies on your behalf.

The National Association of Unclaimed Property Administrators (NAUPA) uses a similar search tool. You can also pay a company to speak directly to insurance companies and find a missing policy. Policy Inspector is one such example, which charges via a $99 flat fee.

Check To See If The Deceased Has a Group Policy

Some employers may offer life insurance as part of their benefits. In order to obtain the benefits, you will need to reach out to the company’s benefits administrator.

One thing to note is that typically the life insurance policy does not carry over if your loved one left the company. The life insurance policy may also have been offered through the deceased person’s union. If this is the case, a union representative will typically reach out to the beneficiary.       

Do I Really Need To Hire An Attorney For a Life Insurance Case?

Though it may seem like a cut and dry process, if a life insurance company has the opportunity to reject a claim with any plausible excuse, they won’t hesitate to do so. It’s important to always consult an attorney with the skills and experience to get you the benefits you deserve. If you’re experiencing any kind of push back from a life insurance company, call our firm today at 1-855-865-4335

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Do life insurance companies have a statute of limitations on payments?

Waiting for a claim to be paid out can be a frustrating process. Generally speaking, claims should be processed and paid out within a month, but this is often not the case. Some claims can take several months before being approved or denied, often being delayed several times by the insurer. Beneficiaries might begin to wonder if they’ll ever get paid, or if there are any deadlines by which the insurance company is legally obligated to respond.

The statute of limitations

The “statute of limitations” is defined as the amount of time under which a dispute can be legally contested. It varies depending on the type of dispute (e.g. personal injury, written contract, oral contract, specific types of insurance, etc.) as well as by state. As applied to life insurance cases, this means that once the statute of limitations has expired, the beneficiary or beneficiaries can no longer file suit against the insurance company.

The statute of limitations does not function as a deadline by which insurance companies must pay out on claims. In life insurance cases, the statute of limitations is designed to help the insurance company, not the beneficiary or beneficiaries. However, many states incentivize prompt payment through regulations.

State-by-state regulations

The vast majority of states have so-called “prompt payment” laws with deadlines and conditions under which claims must be paid. For instance, Michigan’s insurance code dictates that if benefits are not paid within sixty days after the claimant provides proof of loss to the insurer, the insurer will have to pay extra interest. South Carolina, on the other hand, begins accruing interest thirty days after proof of loss. Many states also have regulations requiring payment of claims in a “reasonable” time. Insurance companies that fail to comply with these regulations may be subject to fines or penalties imposed by state departments of insurance.

Although there is no strict “deadline” on life insurance payments, the accrual of interest usually incentivizes insurers to pay out within a month. However, it is not uncommon for life insurance companies to unjustly delay claims as a precursor for denial. If your life insurance claim has been unlawfully delayed, an experienced attorney can help move things along and be prepared in the event that your claim gets denied.

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When can an insurance company cancel a life insurance policy?

When taking out a life insurance policy, the policyholder aims to provide an extra layer of financial security and peace of mind for his or her loved ones. However, since insurers are incentivized to minimize risk, they will frequently look for reasons to cancel customers’ policies. This can jeopardize the policyholder’s supposed financial security and force him or her to evaluate other alternatives. Misrepresentations during the contestability period, nonpayment of premiums, and termination of employment are three of the most common reasons for which insurance companies may decide to cancel your policy.

The Contestability Period

The contestability period is defined as the amount of time during which an insurance company can review and fact-check information on a life insurance application. It is two years from the effective date of the policy in most states, although some (e.g. Missouri) limit it to one year. The contestability period is usually used as a means for denying claims after the insured’s death, but it can also be used in order to investigate and cancel existing high-risk policies.

If the policyholder left out any information on his or her policy application, such as a previous illness, medical condition, or hospital visit, the insurer has the right to investigate statements on the application and cancel coverage if something was left off. Unless there is reason to believe the application was fraudulent, the insurer has little motivation to do this while the policyholder is still alive and likely to live past the two-year contestability period.

Termination of Coverage/Lapse

The most common situation in which an existing life insurance policy may be cancelled is through nonpayment of premiums, i.e. when you don’t make one or more of your monthly payments. Your coverage is unlikely to terminate if you send payment a few days late, as the vast majority of life insurance policies allow for a “grace period” of at least fifteen days. So long as the insurance company receives payment within the grace period, coverage will remain in place.

However, if the grace period expires, your coverage will lapse; in other words, your policy will be cancelled. In such a situation, you have to contact your life insurance company and meet specific conditions before reinstating your coverage. This often involves retroactively making up all missed premium payments.

Termination of Employment

Many people get their life insurance via so-called “group life insurance plans” through their employer. When you are no longer considered an active employee, your coverage will terminate along with your employment. This is often the case with workers who go on disability and are thus no longer considered “active.” Their coverage may terminate even though they are still technically employed.

In these situations, it may be prudent to request that your insurance provider convert your group policy to a privately owned, individual life insurance policy. This often requires paying high premiums and meeting certain provisions as determined by the company.

If your policy has been momentarily cancelled, you can always reinstate it or buy a new one. When the policyholder passes away before reinstating coverage, however, legal recourse may be the only option. If your loved one’s coverage was wrongfully terminated prior to his or her death, it’s best to contact an experienced life insurance lawyer to evaluate your case.

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Do you pay taxes on life insurance benefits?

Life insurance is typically taken out to provide a secure, guaranteed pool of funds for a loved one in the event of the policyholder’s death, often used to compensate for funeral expenses and loss of income. When the beneficiary files a claim, he or she might be emotionally distraught and in desperate need of income. The last thing they’re going to want to do is think about taxes. Fortunately, the death benefit from a life insurance policy is not taxable in the vast majority of cases. However, there are several possible exceptions to this rule:

Taxes on Accrued Interest

While many life insurance policies distribute death benefits in one lump sum, some distribute death benefits via a series of regular (most likely annual) installments to the beneficiary or beneficiaries. If the principal death benefit is $100,000, paid over 10 years at a rate of $10,000 per annum, the amount left with the life insurance company each year may accrue interest. In this case, the $100,000 principal would remain untaxed, but any growth from interest would be taxable.

The Estate Tax

Additionally, if the beneficiary is not locatable and/or deceased (see our article: What happens to the benefits for a life insurance policy when the beneficiary is deceased?), the death benefit will usually be added to the policyholder’s estate. In the rare event that the policyholder’s total estate value exceeds $5,430,000, the excess amount will be taxed. At the federal level, this tax will most likely be at a rate of 40%. For example, let’s say John named his wife Susan as beneficiary on his life insurance policy, but Susan passed away a year prior to John’s death. Now John is deceased, so the death benefit from his policy is added to his estate value. His estate (including the death benefit) is valued at $10 million, so he pays 40% of ($10,000,000-5,430,000), which results in a tax of $1,828,000. John’s relatives are left with an amount of $8,172,000.

Estates less than $5.43 million are not taxed by the federal government, but state-by-state estate taxes are highly variable. Some states may tax the benefit, any accrued interest, or some combination thereof. Reassuringly, most states do not tax the actual policy value.

These are unusual and highly specific circumstances, that do not affect the vast majority of life insurance payouts. However, just because your death benefit is safeguarded from federal taxes does not mean that it’s guaranteed. Life insurance companies will often find ways to delay or deny your claim, as they are financially motivated to hold onto your benefits. If you believe that your claim has been wrongfully denied, it’s in your best interest to contact an experienced life insurance lawyer.

 

 

 

 

NOTHING IN THIS POST SHOULD BE TAKEN AS LEGAL OR TAX ADVICE.  DO NOT RELY OR ACT ON THIS POST AS LEGAL OR TAX ADVICE. WE ARE NOT TAX LAWYERS.  IT IS INTENDED TO BE INFORMATIVE ONLY.  If you have further questions or would like legal advice, please feel free to contact The Boonswang Law Firm at (855) 865-4335.

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