SI KC01130.300 Life Insurance Policies Designated or Assigned to Fund Burial/Funeral Arrangements
See SI 01130.300
Several life insurance companies which do business in the Kansas City Region have introduced products for prearranged funerals. Field offices may receive inquiries either from insurance companies who wish to market new products, or from individuals who have purchased these products and need to know how the policies will be regarded under SSI resource rules. The field office's response will depend upon several factors which are covered in the following sections. This transmittal was based on information received from the Office of the General Counsel for the Kansas City Region.
1. Inquiries concerning approval of new products
In general, when an insurance company inquires about one of its products, we must have specific information about the item's status under the law's of the State in which they wish to do business. This information is needed before any response can be given about how such a product would be treated under SSI rules.
2. Inquiries concerning specific policies
Most questions received by field offices will be from individuals who have already entered into a burial arrangement, and who want to know how the burial plan will affect their SSI eligibility. The following sections explain some issues that have previously been reviewed by the regional office. This information does not replace the POMS instructions on burial contracts, burial insurance, or burial funds.
B. Waiver of rights to Cash Surrender Value (CSV)
One form of burial plan consists of a life insurance policy or an annuity which is considered by the recipient to be a burial arrangement. This section applies to policies where the individual is the owner, proceeds are not limited to payment of burial expenses, and the policy accrues cash value.
To avoid having SSI count the CSV of the insurance policy as a resource, some insurance companies have created various "Waiver of Rights to Cash Surrender Value" forms.
2. Survey of State rules on CSV of life insurance policies
All States in the Kansas City Region allow for annuity contracts which do not provide cash surrender value. Therefore, the rights to cash surrender values of annuities may validly be waived. Life insurance policies, however, are subject to stricter rules.
Iowa Code section 508.37 provides that life insurance policies must contain certain nonforfeiture provisions. These are known as the "Standard Nonforfeiture Law for Life Insurance", and are included in the statutes of many States. If an ordinary life insurance policy has been in force for 3 years, (or an industrial policy in force for 5 years), paid up nonforfeiture benefits or CSV must be paid if the policy is surrendered within 60 days of a premium default. Also, if the policy is paid up by completion of premium payments, the company must pay the cash surrender value of the policy if surrendered within 30 days of the policy anniversary date. Iowa has not enacted any provision allowing a company to issue a life insurance policy which does not provide for any CSV prior to the death of the life insured (except for term policies).
Kansas law provides that life insurance contracts are not ordinary contracts in which the parties may bind themselves as they wish. Every policy must contain provisions required by law regardless of the wishes of the parties. Kansas statute section 40-428 provides that life insurance policies, except term insurance, must allow for nonforfeiture provisions similar to those listed for Iowa above. In addition, statute section 40-420(5) states that life insurance policies must allow for loans against the CSV of the policy.
The State of Missouri has nonforfeiture provisions similar to those of Iowa. However, Missouri recently enacted a statute which modifies those provisions. Missouri Statute section 376.677 provides that "after September 28, 1987, a company may issue policies of life insurance which differ from its existing or currently filed policies only in that they do not provide for any CSV prior to the death of the life insured. If the policy provides for any cash surrender values, endowment, or pure endowment prior to the death of the life insured, this exemption shall not apply". There are specific notice provisions in 376.677(1) which must be satisfied.
Under the terms of Nebraska Statute section 44-407.01, the purchaser of a life insurance policy in Nebraska has a right to obtain the CSV of the policy after a default in the payment of premiums if the premiums have been paid for 3 full years. The purchaser also has a right to the CSV if the policy is paid up by completion of premium payments, or if it was continued under any paid up nonforfeiture benefit which became effective after 3 full years of payment. Nebraska has not enacted a statutory provision allowing a company to issue life insurance policies not providing for a CSV prior to the death of the insured.
3. Evaluation of life insurance policy cash value waiver
The validity of a CSV waiver should be developed only if the CSV could be considered a countable resource. If the total face value of all policies on the individual is $1,500 or less, apply the life insurance exclusion (SI 01130.300).
If CSV is an issue, apply the following rules:
If the Waiver is Then:
Valid The CSV of the life insurance is not a resource.
Not valid The CSV is a countable resource unless:
It is designated as a fund set aside for burial. (the CSV may not all be excludable if the individual's other assets set aside for burial, when added to the CSV, are over $1,500), or
The individual is not the owner of the policy, or
The individual has no access to the CSV or loan value of the policy (e.g. the individual has not owned the policy for 3 years - nonforfeiture provisions do not yet apply).
Note: If the individual is not the owner of the policy, or has no access to the policy, it is not a resource. See section SI KC01130.300D.2 for information on transfer of ownership of a life insurance policy.
Use the following chart to determine if a waiver of CSV is valid and enforceable under State laws.
Is a waiver of cash surrender For the following type of value valid under the State law of: policy?
* If policy was issued after September 28, 1987, and specifically did not provide for cash surrender value. This should be stated on the first page of the policy.
C. Naming the funeral home as beneficiary of an insurance policy
The naming of a beneficiary is not usually an irrevocable designation. In addition, naming the funeral home as beneficiary does not necessarily mean that the proceeds of the policy may be used only for burial expenses, unless this is stated in the policy. Therefore, even though a funeral home is the beneficiary of a policy, the CSV may still be counted as a resource to the individual unless otherwise excluded.
Funeral directors/homes are often designated as the beneficiary of burial insurance policies. Determine if the policy is burial insurance (see SI 01130.300A.8 and SI 01130.410C.1.d).
D. Assignment of ownership of policy to funeral institution
Life-insurance-funded burial contracts are subject to the limitations on the amount of money which may be placed in irrevocable burial contracts. In Nebraska, the first $3,000 of any pre-need burial policy or contract may be designated as irrevocable. In Kansas, up to $2,000 of any funeral service policy or contract may be irrevocable. However, Kansas has no dollar limit on irrevocability of a policy or contract for burial space items. See SI KC01130.420C.
Some insurance companies seek to avoid the counting of CSV in SSI resource computations by having the individual transfer ownership of the policy to the funeral home. The irrevocable agreement prohibits the person transferring ownership of the policy from receiving any funds from the policy, and entitles the insured to funeral services from the death benefits of the policy. In order to be valid, such transfers must be irrevocable. See SI 01150.010.
2. Transfer of resource considerations
On or after 12/14/99, assignment of the ownership of a policy to a funeral director must represent the purchase of a funeral arrangement. If it does not, it may constitute a transfer of resources at less than fair market value. Prior to 12/14/99, such transfers do not affect SSI eligibility, but may affect Medicaid eligibility. See SI 01150.100.
3. Forethought life insurance company
The Office of the General Counsel has determined that the "Irrevocable Assignment of Policy Ownership" used by this company is valid. When this form is signed by the individual, the insurance policy is no longer a resource because the individual is no longer the owner. To date, the regional office has reviewed Forethought Life Insurance Company policies from Nebraska and Kansas.
E. Questionable situations
This summary can not cover all life insurance contracts that field offices are likely to encounter; for example, you may find a policy where the irrevocability of an Assignment of Ownership is in doubt. If you have a case where the resource status of a life insurance policy cannot be determined from POMS instructions, call and discuss the case with the SSI policy staff on the RSI/SSI Team. Regional Office staff will decide if referral to the Office of the Chief Counsel for Region VII is appropriate.