7 Pay Test Application

[gnanda]

Hi all,

I have a question about what portion of a WL policy the 7 pay test is applied to.

Basiclally I have a WL policy with the following:
1) A base of $295,000
2) A 10 year term rider for $100,000
3) PUA of $45,000

So total death benefit is 295000 + 100000 + 45000 = 440000

My base premium is $3320 and my insurance company allows me to contribute up to 3 times my base to PUAs. So is the 7 pay test limit to determine MEC level applied to the entire $440,000 or does it only apply the base amount + term amount (395000)?

As mentioned, I'm contributing $3320 to base plus $9960 PUA per year = $13280. I'm assuming the 7 pay test is being re-calculated every year due to the increase in death beneift from the PUAs being purchased every year which increases the PUA death benefit by about $40K a year. So my concern is that at year 10 when the term expires, my death benefit drops by $100,000 which means the 7 pay test would be applied at an amount that is $100K lower.

I should have the following value after year 10:
base = $295000
PUA = $400000
Term = $0 (expired)
Total policy = $695000

So would the 7 Pay test be re-applied using the entire $695000 in death benefit in which case I think I should be okay....or would it be applied to just the base $295,000 which excludes the PUA death benefit...in which case I think it would MEC.

Also it seems odd that the PUAs can eventually have a higher cash value and death benefit than the initial base policy which seems odd.

I'm in year 3 of the policy and wondering if I should continue to max out the PUAs since premiums from years 4-10 will be used to calculate the 7 pay when the term drops in year 10....

Thanks!

 

[pfg1]

Your thinking is correct. Adding the term rider to the policy bumps up the MEC limit, which allows for funding more $$ into the PUA's. So once the $100k term amount is no longer there, the MEC limit is lowered by default because its only looking at the base + pua's.

I would check with your carrier to be sure what your actual options are.
In my experience, the term rider can be renewed each year after the initial term period - just not at the locked in price, it basically becomes annually renewable term. So for example, maybe you pay $150 now for a 10yr term rider..... you can still keep it, just that it will increase after year 10 to annually renewable term priced for age/rating.


So if you fund the policy through year 10 at max funded, then you just carry the term rider for "x" amount of years afterwards and then drop it. Sure, you might pay a little more over that time for the $100k death benefit, but in doing so it gave you the opportunity to max fund the policy for 10yrs. How long you have to carry it will be determined by the specifics of your policy, and how you actually funded it.

I'm pretty sure this is correct and I hope this makes sense. Again, contact your carrier for specific info pertaining to your policy, they can tell you exactly. Maybe some of the resident WL experts here will chime in also.

 

[TwiLight]

Entire death benefit is used (base + term + PUA db).

Yes the calc is reset each year, the increased death benefit causes a material change

Drop in death benefit after term expires in year 10 should not cause a MEC so long as you stop paying PUA premium. MEC rules stipulate that you cannot violate the 7-pay Test by simply paying the required premium (unless that premium originally violated the test at issue, e.g. SPWL).

The only problem you face after the 7pay testing is the DEFRA/TEFRA Guidline Premium Limits and may require a reduction or return of premium after the 7th year if premium is paid. This is also to be considered in your contribution testing if premiums are continued after the MEC period.

 

[BNTRS]

The test is determined off the entire death benefit so you'd add all of those pieces together.

The expiration of the 10 year term insurance rider could create a MEC violation. The question becomes would you be able to pull premium out of the policy to go back to MEC compliance without driving the death benefit down further since you'd be surrendering PUA's to do this.

How much over the 7-Pay Premium is your current planned premium?

 

[pfg1]

The test is determined off the entire death benefit so you'd add all of those pieces together.

The expiration of the 10 year term insurance rider could create a MEC violation. The question becomes would you be able to pull premium out of the policy to go back to MEC compliance without driving the death benefit down further since you'd be surrendering PUA's to do this.

How much over the 7-Pay Premium is your current planned premium?

Could they also keep the term rider on as I stated above, thus keeping the actual MEC limit high enough to satisfy the test - and not paying into the pua's after year 10? Am I right in my thinking?