Life insurance is a necessary part of any well-considered estate plan. A term life policy that covers you for a certain number of years can help ensure money is available to your beneficiaries to pay expenses after your death. Whole life coverage provides a guaranteed death benefit as well as offering lifetime benefits through access to the accrued cash value in the policy. However, it’s important to understand all of the benefits and drawbacks of a particular policy before you buy. One consideration that varies depending on the type of life insurance policy is the right to recover life insurance premiums paid in the year of death.
New York Insurance Law Section 3203 requires that certain terms must be included in all New York policies. Specifically, Section 3203(a)(2) provides that “if the death of the insured occurs during a period for which the premium has been paid, the insurer shall add to the policy proceeds a refund of any premium actually paid for any period beyond the end of the policy month in which such death occurred.”
This provision offers some protection in the event of a situation where, for example, the annual policy premium is due and paid in January, and the insured dies later that month. However, the section does not apply where a single premium is paid for the entire policy term, such as where you pay all premiums due for the life of the policy in Year 1, or you have a “paid-up policy,” where no additional premiums are due.
Recently, the New York Court of Appeals in Nitkewicz v. Lincoln Life & Annuity Co. of New York addressed the scope of this right of premium recovery as it applies to a different insurance product, known as “universal life insurance.” Universal life is permanent insurance that builds cash value but allows more flexibility in time and amount of premium payments than whole-life coverage. (Note that whether universal life coverage is an appropriate product for you specifically is beyond the scope of this article and should be discussed with an insurance professional.)
Universal life insurance has a minimum “cost of insurance” which must be paid to maintain the insurance. Any premiums paid in excess of that amount are added to the cash value in the policy.
Under the policy at issue in Nitkewicz, the policy owner paid an annual premium into a policy account. At the beginning of each month, the insurer withdrew that month’s “cost of insurance.” The insured died 5 months after paying an annual premium, and the insurer refused to return any portion of the premium.
The Court held that while termed a “premium,” the annual payment into the policy account was not strictly required to maintain the insurance for any particular time period and was not in fact guaranteed to keep the insurance in place. The policy owner could decide not to make any payment and allow the monthly “cost of insurance” to be withdrawn from assets already contained in the policy account. Therefore, the Court held that this “planned premium” was not within the scope of Section 3203(a)(2), and no portion had to be refunded by the insurer.
The takeaway of this case is that your trusted advisors (estate planning counsel, insurance professionals and financial advisors) need to work together in making decisions on the placement and funding of insurance to ensure you understand all of the implications of choosing one type of policy over another.
If you need assistance with creating or updating your estate plan, contact one of our experienced attorneys to learn how we can help you.