Terminal Diagnosis, an Irrevocable Beneficiary, and an Unpaid Policy Loan
Delores, 63, owns a $250,000 whole life policy insuring her husband Marcus, 66. Their son Andre, 34, is named irrevocable beneficiary. Five years ago Delores borrowed $40,000 against the policy at 8% simple annual interest and has made no payments since; the current cash value is $61,000. Delores has just been diagnosed with a progressive neurological disease, has stopped working, and is now receiving Social Security disability benefits. Marcus is in good health and still works part-time. The policy includes a waiver-of-premium provision, a terminal-illness accelerated death benefit, and carries a $4,800 annual premium due next month. Delores asks whether her disability lets her stop paying premiums, whether the accelerated benefit is payable now, and what Andre would actually receive if Marcus died this year.
1. Can Delores stop paying premiums under the waiver-of-premium provision because she is now disabled?
Read the worked answer
No - not under this provision.
- Waiver of premium is triggered by the insured's disability. Marcus is the insured; Delores is only the owner. Her disability is irrelevant unless the contract has a separate payor (owner) waiver rider, which this policy does not.
- Even if Marcus became disabled, the waiver typically requires total disability sustained for a waiting period (commonly 6 months), beginning before a stated age (often 60 or 65), with premiums refunded retroactively for the waiting period.
- If Delores simply stops paying, the $4,800 premium will be taken from cash value under the automatic premium loan or the policy will lapse.
Planning point: with $61,000 of cash value and $4,800 of annual premium, a paid-up or reduced-paid-up option, or switching to an annual premium withdrawal, is a real alternative - but the waiver rider is not available here.
2. Is the terminal-illness accelerated death benefit available now because of Delores's prognosis?
Read the worked answer
No.
- An accelerated death benefit is triggered by the insured's terminal illness (usually a prognosis of 12 or 24 months or less). Marcus is the insured and is in good health; Delores's diagnosis does not qualify.
- Three further constraints would apply even if Marcus were terminally ill:
- Election is the insured's, and acceleration normally requires the irrevocable beneficiary's written consent, since it reduces Andre's benefit.
- The acceleration is typically a discounted lump sum or a lien against the face amount - it does not create extra coverage; the death benefit is reduced dollar-for-dollar plus an administrative discount.
- Amounts paid are treated as death proceeds under IRC §101(g): income-tax free, though they can count as an incident of ownership for estate-tax purposes if the insured owns the policy.
So the answer would still be 'no accelerated benefit today,' and the correct advice is that the rider does not solve the current cash-flow problem.
3. If Marcus dies this year, what does Andre actually receive, and how is it taxed?
Read the worked answer
Approximately $194,000, income-tax free.
Loan math (8% simple interest, per the facts):
- Principal: $40,000
- Interest: $40,000 × 0.08 × 5 = $16,000
- Total indebtedness: $56,000
Net death benefit: $250,000 − $56,000 = $194,000, paid to Andre and excludable from his gross income under IRC §101(a). The insurer deducts the loan from the proceeds rather than collecting from the family.
Watch the margin: cash value is $61,000 against $56,000 of debt - only $5,000 of cushion. If interest compounded or another premium were added to the loan, the policy would lapse and Andre would receive only the small net cash value.
Also flag: Delores holds all ownership rights, so if she dies first the policy is an incident of ownership in her estate and its value is included in her gross estate. Because Andre is an irrevocable beneficiary, Delores cannot change the beneficiary, surrender the policy, or assign it without his consent - but she can still direct the disposition of her ownership interest at death.