When Good News Can Turn On You!

2001 brought good news for the insurance industry and the consumers of that industry as the new CSO (Commissioner’s Standard Ordinary) 2001 mortality table was released and put into use in determining life insurance rates. By the way, if you haven’t poked around a mortality table report before, kick back some evening with your laptop and enjoy.

Given that it had been 21 years since a new mortality table had been implemented, the change was long past due in favor of consumers. Everyone knew that people were living longer and that morality experience from things like cancer and heart disease had changed dramatically. They just didn’t have the data to back up the assumptions.

While rates had been going down pretty steadily through the 1990’s, those rate changes were based on assumption and once the 2001 table was released and implemented, it gave companies harder data to base rate changes on. In many cases this allowed companies to be more aggressive with rate decreases and well, that’s good news.

Hidden in that good news is some problematic news for people who own policies that were issued and based on the CSO 1980 mortality table. People make changes to policies all the time. They may come back to the company and ask for an increase in the face amount of the policy or if they have corrected a cholesterol issue, they might want to petition the company to change the rate class of the policy, lowering the premium to reflect their under control cholesterol.

The problem is that if a change to a policy is not contractually specified in the original policy, and the company allows the change and doesn’t bring the amended policy under the new 2001 table, the IRS could deem the policy in violation of the definition of life insurance and change some of the tax advantages.

For instance. Companies will often have a policy of allowing someone to be reconsidered as a non smoker, on an in force policy issued when they were smoking, once they have not used tobacco or nicotine products for 12 months. That practice isn’t contractually guaranteed in the life insurance policy, therefore the insured has to make a choice of sticking with the 1980 table smoker rates or reapplying for non smoker rates under the 2001 table. Since the 1980 table is no longer valid and the smoker status change isn’t contractually specified, the change can’t be made to the old policy.

In most cases the prudent move would be to go to a new policy under the new mortality tables, but not always. What might be gained if your health has remained the same, could very well be negated by a negative health change.

Bottom line. This isn’t a huge issue in the whole scheme of things. It probably won’t impact many, but before you move ahead with some change in your policy, make sure your agent and company are able to assure you that there won’t be any change in the tax status of the policy.