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THE UNIVERSAL LIFE INSURANCE POLICY AT ISSUE WAS NOT SUBJECT TO INSURANCE LAW 3203(A)(2) WHICH REQUIRES A PROPORTIONAL REFUND WHEN THE INSURED DIES DURING THE PREMIUM PERIOD (CT APP).

The Court of Appeals, in a full-fledged opinion by Judge Singas, answering a certified question from the Second Department, determined that the universal life policy at issue was not subject to Insurance Law 3203(a)(2) which requires a proportional refund of a paid life insurance premium when the insured dies during the period covered by the premium. Universal life policies are substantively different from term or whole life policies. The court explained the unique aspects of universal life insurance:

Universal life insurance is distinct from term and whole life insurance. To maintain coverage under a term or whole life policy, the policyholder must pay fixed, periodic premiums. A universal life insurance policy does not have a fixed premium—instead, the policyholder can make a payment in any amount, at any time, subject to certain conditions specified in the policy. These payments are deposited in a “cash value account,” also known as a “policy account,” an interest-earning account administered by the insurer. The insurer deducts from the policy account the cost of insurance (COI), which varies from month to month based on variables including the insurer’s total exposure, any administrative fees, and other required payments from the policy account. The remaining funds in the policy account can grow tax-free over time based on an interest rate set by the insurer and can fund future deductions. Universal life insurance policyholders can typically add funds to the policy account at any time and in any amount. Policyholders often choose—but are not required—to pay a “planned premium,” which is a periodic payment often designed, but not guaranteed, to keep the policy in force. A failure to pay a planned premium does not result in termination or lapse of the policy so long as the funds in the policy account are sufficient to cover the deductions. Depending on the terms of the specific policy, the policyholder may also be able to withdraw funds or take loans against the policy value as long as sufficient funds remain to cover the deductions. Nitkewicz v Lincoln Life & Annuity Co. of N.Y., 2023 NY Slip Op 05302, CtApp 10-19-23

Practice Point: Here the universal life insurance policy was not subject to Insurance Law 3202(a)(2) which requires a proportional refund of the premium when the insured dies during the premium period.

Practice Point: The unique aspects of a universal life insurance policy versus a term or whole life policy clearly explained.

 

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