TN 61 (09-10)

A. Introduction to life insurance

A life insurance policy is a contract that can sometimes be turned into cash; therefore, claims representatives (CRs) must develop the resource value of the policies to determine Supplemental Security Income (SSI) eligibility. The basic concept of the contract is that the policy owner pays the premiums during the insured’s lifetime and, when the insured dies, the life insurance company will make one or more payments to the designated beneficiary(ies). However, life insurance companies have created many varieties of their products, which may require additional research and documentation.

B. Glossary

1. Accelerated life insurance payments

Accelerated life insurance payments allow some or all of the proceeds of the life insurance policy to be paid out to the policy owner prior to the death of the insured. Receipt of these types of payments may reduce the face value (FV) and cash surrender value (CSV). A policy owner can also take out a loan against the life insurance policy. (For procedure when dealing with accelerated life insurance, see SI 01130.300F in this section).

Accelerated life insurance policies can provide three basic types of payments:

1. Long term care model – policy owner can access the death benefit of the contract to pay for extended care in a facility or for home health care.

2. Dread disease or catastrophic illness model – policy owner can access the death benefit of the contract in order to care for the insured during any specified covered condition.

3. Terminal illness model – policy owner can access the death benefit of the contract when a terminal illness is diagnosed for the insured and death is expected to occur within a specified period.

2. Annuity

An annuity is a life insurance product that provides income to the policy owner while they are still living. The terms of the contract are that an individual deposits money with an insurance company either all at once (lump sum) or over several years. The money then earns interest at a tax deferred rate and the owner has limited access to the fund for a designated accumulation period (typically lasting 7 – 10 years). At the end of the accumulation period, the policy owner has several distribution or annuitization options, ranging from a higher monthly income for a short specified period to a smaller income until their death.

Factors such as state law and irrevocability determine whether an annuity is a countable resource. For information regarding how to treat an annuity as income see SI 00830.160.

3. Beneficiary

The policy owner names the beneficiary in the policy as the person(s) who will receive the proceeds upon the death of the insured.

4. Burial insurance

Burial insurance is a contract whose terms preclude the use of its proceeds for anything other than payment of the insured’s burial expenses.

NOTE: If a policy has a CSV to which the owner has access, the policy is not burial insurance for SSI purposes.

5. Cash surrender value (CSV)

Cash surrender value (CSV) is the monetary or equity value that a life insurance policy acquires over time as the policy owner pays the premiums and dividend additions and interest are added to the policy. The policy owner can take out loans against this amount and can obtain the full CSV by cancelling the life insurance policy before the insured dies or the policy matures. A loan against a life insurance policy reduces its CSV. The CSV is the actual resource value of the life insurance policy for SSI’s purposes.

NOTE: Dividend accumulations are considered a separate resource.

6. Demutualization

Demutualization occurs when a life insurance company converts from a policyholder owned mutual company to a stockholder owned company. As part of demutualization, the insurance company issues shares of stock or cash to its policy owners to compensate them for the loss of certain ownership rights.

NOTE: To determine if demutualization will affect the individual’s countable resources, see SI 01130.305.

7. Dividends

“Mutual” or “participating” life insurance companies may offer their policy owners payment from the company’s annual surplus earnings, which they call dividends. Insurance companies pay these dividends in one of three ways:

• Issuing checks to the owners (usually annually),

• Applying the funds to premiums due; or

• Crediting the funds as an addition or accumulation to the existing policy.

a. Dividend accumulations

Dividend accumulations are surplus company earnings, which accrue in an account that the insurance company controls for the policy owner. The policy owner can access these funds without penalty at any time without affecting the FV or CSV. Therefore dividend accumulations may be countable resources unless they are excluded under another resource exclusion (e.g., set aside for burial).

b. Dividend additions

The insurance companies use surplus company earnings, called dividend additions, to buy more insurance protection for the life insurance policy owner. Dividend additions increase the FV and CSV.

NOTE: The tables of CSVs that come with a life insurance policy do not reflect the added CSV of any dividend additions.

8. Endowment

An endowment is a type of life insurance policy in which CSV is built up within the policy until the CSV equals the FV. If the insured outlives the policy, the FV is paid to the insured. If the insured does not outlive the policy, the FV is paid to the beneficiary.

9. Face value (FV)

Face value (FV) is the amount that is contracted for at the time the life insurance policy is purchased – it is the amount to be paid out when the insured dies. The front page of the life insurance policy may show it as such, or as the “amount of insurance,” “the amount of this policy,” “the sum insured,” etc. A life insurance policy's FV does not include:

• the FV of any dividend additions, which are added after the life insurance policy is issued;

• additional sums payable in the event of accidental death or because of other special provisions; or

• the amount(s) of term insurance, when a policy provides whole life coverage for one family member and term coverage for the other(s).

10. Insurable interest

Insurable interest means there would be a financial loss by the owner in the event of the death of the insured person.

11. Insured

The insured is the person on whose life the insurance company issues the policy.

12. Limited pay

A limited pay policy is a type of whole life policy in which all premiums are paid for a certain period, after which no more premiums are due.

13. Loan

A loan is a cash advance made by the life insurance company to a policy owner on the security of the cash value of the life insurance policy. Loans reduce the CSV of the policy.

14. Modified whole life policy

A modified whole life policy charges smaller premiums for a specified length of time after which the premiums increase for the remainder of the policy.

15. Owner

The life insurance policy owner can be the insured, another individual, a company, or a trust with an insurable interest in the insured person. The life insurance policy can be a resource only to the owner of the policy.

16. Participating policy

A participating policy is life insurance that is eligible for payment of dividends by the insurer. (See “dividends” at SI 1130.300B.7. this section)

17. Permanent policy

A permanent policy is any form of life insurance except term policies. Generally, a permanent policy, such as whole life, universal life, etc builds up a cash value.

18. Premiums

Premiums are the amount the policy owner pays during the lifetime of the policy to keep it in force. In most cases, if the owner stops paying the premiums the policy will lapse and become inactive.

19. Pre-need senior or final expense

Pre-need senior or final expense policies are whole life policies designed specifically to cover funeral expenses. The life insurance policy owner signs an arrangement with the funeral home and, at the insured’s death, the proceeds are assigned to the funeral home for payment of services it promises to render. Most contracts dictate that any excess proceeds are paid either to the insured’s estate or to designated beneficiary(ies).

20. Proceeds

The proceeds of a life insurance policy are the total of the FV of the life insurance policy plus any additions payable at maturity or upon death. Proceeds do not include dividends or interest that are left to accumulate in the life insurance policy. Also, proceeds do not include a life insurance policy's CSV.

21. Riders

Riders are modifications the policy owner adds to the life insurance policy at the time of purchase. A common example is accidental death (which pays twice the FV if death is from accident). Riders do not alter the FV or CSV of the policy.

22. Single premium whole life

Single premium whole life is a kind of life insurance policy with only one premium payable at the time the life insurance policy is purchased.

23. Supplementary contract

A supplementary contract is not a life insurance policy. It is an agreement whereby, when the life insurance policy matures or the insured dies, the proceeds are paid not in a lump sum, but in an alternative manner selected by the individual, usually as an annuity.

NOTE: Treat supplementary contracts, which provide for an annuity, in accordance with the instructions on filing for other benefits as described in SI 00510.001C.

24. Survivorship life

Survivorship life, also known as joint life insurance, is a whole life insurance policy insuring two lives (generally spouses) with the proceeds payable to the beneficiary(ies) on the later death of the second person.

25. Term life

A term life policy is life insurance that provides coverage for a specified period at a guaranteed rate. This type of life insurance policy may or may not have a CSV; ask the policy owner and follow procedure in this section for documentation. Some common subtypes are mortgage insurance and group insurance. Policy owners have the option of converting some term life insurance policies into whole or universal life insurance policies (convertible). Alternately, policy owners can renew the policy at the end of its term for limited number of successive terms (renewable).

26. Universal life

Universal life policies provide insurance over a specified period, and build cash value for policy owners over time. They have greater flexibility in premium payment and potential for higher internal rates of return. There are several types of universal life policies, including variable universal and equity indexed universal life. All universal life policies include a cash account in addition to the standard death benefit.

27. Whole life

Whole life is a form of life insurance that applies part of the premium payments to build an investment or savings value for the policy owner. The investment or savings value is called the CSV of the policy.

A modified whole life policy charges smaller premiums for a specified length of time after which the premiums increase for the remainder of the policy.

C. Policy for developing life insurance

1. Life insurance as a resource

Consider the resource value of a life insurance policy to be its cash surrender value (CSV), not its face value (FV).

You must regard dividend accumulations and other available cash vehicles (e.g. annuities) attached to the life insurance policy as separate resources and value individually.

2. Limited life insurance exclusion

a. Life insurance policies owned by one person that insure one person

• Exclude as a resource those life insurance policies owned by one person that insure only one person, if the cumulative FV of all policies held on that one person amount to $1500 or less.

• Do not include the interest or dividend additions that have accumulated on the FV when determining whether a policy is a countable or excludable resource. Excluding the policy means excluding the CSV not any other part of the policy (e.g., the dividend accumulations).

This life insurance exclusion applies per person--$1500 per insured individual.

EXAMPLE – Owner has three policies on herself

Mrs. Lambert, an aged individual, owns three life insurance policies on herself with the following values:

• $400 FV with $700 CSV,

• $500 FV with $1000 CSV, and,

• $200 FV with $400 CSV

$400 FV + $500 FV + $200 FV = $1100 total FV which is less than $1500 total FV

The total FV of her policies is $1100 ($400 + $500 + $200 = $1100). Even though the total CSV of the three policies ($700 + $1000 + $400 = $2100 CSV) is more than the resource limit of $2000, the life insurance policies are entirely excluded because the life insurance policies are for the same insured person and the total FV is less than $1500.

EXAMPLE – Owner has policies on herself and others

Mrs. Lambert, from the previous example, also owns three additional life insurance policies on herself and on other insured people. In this case, the claims representative (CR) calculates for each insured, whether the total FV of those policies is less than $1500. If the total FV of the policies owned on each of the other people is less than $1500, those policies are also excluded.

b. What not to count when determining total FV

Do not count the FV of the following when determining whether the total FV of the life insurance policies owned on a specific insured person totals $1,500 or less:

• burial insurance policies; and

• term insurance policies that do not generate a CSV.

3. Burial fund exclusion

The burial fund exclusion allows an individual to designate up to $1500 of various kinds of resources as burial funds. (For burial fund exclusion instructions, see SI 01130.410). The burial fund exclusion works in conjunction with the life insurance exclusion, described in SI 01130.300C.2. because the $1500 set aside for burial must be reduced by the FV of:

• any life insurance policy that is already being excluded by the life insurance exclusion; and,

• any burial insurance policy for the burial expenses of the individual.

The $1500 burial exclusion must also be reduced by the FV of a life insurance policy for which a funeral provider has been made the irrevocable beneficiary, if the life insurance policy owner has irrevocably waived his or her right to, and cannot obtain, any CSV the life insurance policy may generate.

4. Dividend additions and dividend accumulations

a. Dividend additions

• Do not include the FV of dividend additions when determining whether a life insurance policy is a countable or excluded resource:

• If the life insurance policy is a countable resource, do include the CSV of dividend additions when determining the resource value of the policy.

• If the life insurance policy is an excluded resource, do not include the CSV of dividend additions when determining the individual's countable resources.

b. Dividend accumulations

• Do not exclude dividend accumulations under the life insurance provision, even if you exclude the life insurance policy that pays the accumulations.

• Unless the accumulations are excludable under another provision (for example, because they have been set aside for burial), count the accumulations as a resource, even if you exclude the life insurance policy itself because the policy's FV is $1,500 or less.

c. Income treatment of dividends

Dividends count as income if the total face value of the all life insurance policies on any one person does not exceed $1500. Dividends are excluded as income if the life insurance policy is countable as a resource. If the life insurance policy is set aside for burial, dividends are also excluded.

D. Procedure for life insurance documentation

1. Exception to verification

Do not verify term life insurance provided by an employer.

2. Using the individual's records for verification

The primary source of evidence for life insurance verification is the claimant or their representative.

a. Document at onset of the claim

Document the life insurance and related resources thoroughly and accurately at the onset of the claim--preferably at the PERC--using the Life Insurance (RLIF) page, locked DROC, EVIEW and/or NDRED.

b. Life insurance assumptions

Absent evidence to the contrary, assume that a:

• term policy without a table of CSVs, if it appears otherwise complete, does not generate a CSV;

• life insurance policy that does not generate a CSV also does not pay dividends;

• life insurance policy issued by a nonparticipating or stock company does not pay dividends;

• life insurance policy issued by a participating or mutual company pays dividends.

NOTE: The kind of company issuing the life insurance policy is usually identified by a designation following its name on the face page of the life insurance policy (“participating” or “non-participating”).

c. Documents to ask the individual to submit

Ask the individual to submit:

• all the life insurance policies he or she owns; and

• the most recent annual dividend statement issued by the company for each life insurance policy (if applicable).

Before the pre-effectuation appointment (PERC), or redetermination (RZ), you may contact the life insurance policy owner by mail or phone and ask that they mail or bring the policy to you.

d. What to verify for both countable and excludable life insurance policies

Verify the following:

• the owner

• the insured

• the FV

• the date the life insurance policy was purchased

• the maturity date, if specified

• the policy number

• an address, phone number, or any contact information for the insurance company

• information regarding whether the life insurance policy pays dividends and, if it does, what option the policy owner selected for their disposition (i.e., accumulations, additions, applied to premiums, paid by check)

• the current amount of dividend accumulations, if any.

e. What to verify for countable life insurance policies

Verify the following:

• whether the life insurance policy generates a CSV and, if so,

• the current CSV (including the CSV of any dividend additions and any loans on the life insurance policy that reduce the CSV).

f. Document the life insurance evidence

Document the life insurance information on the Life Insurance (RLIF) page and a locked DROC. If possible, fax the entire policy--paying specific attention to the future CSV page--into EView or NDRED, as appropriate.

3. Contacting an insurance company or agent for verification

• If examination of a life insurance policy does not reveal one or more of the items listed in SI 01130.300D.2.b. in this section, contact the policy owner's agent or the insurance company by phone, fax, or on-line, and document the information on the Life Insurance page and a locked DROC, subject to the operating instructions in SI 01130.300D.2.a. in this section.

• If you are conducting an in-office interview, consider asking the life insurance policy owner to call their insurance company or go on-line to obtain the insurance information while they are in the office.

  NOTE: Often the insurance company requires a signed consent from the life insurance policy owner.

  Have the life insurance policy owner sign an SSA-8510 (Authorization for the Social Security Administration to Obtain Personal Information) in order to obtain the information.

4. Post-adjudicative verification

If neither the life insurance policy owner nor the insurance company are able to provide the information needed to document the life insurance policy, post-adjudicative verification becomes necessary.

a. Criteria for post-adjudicative verification

• Determine whether the life insurance policy pays dividend additions or accumulations.

• If the policy pays (or is alleged to pay) dividend additions or accumulations, the following rules apply: If the policy is (or is alleged to be) three years old or less, adjudicate using chart in SI 01130.300D.4.b. (in this section) to estimate the CSV and develop the life insurance post-adjudicatively.

• If the policy is (or is alleged to be) over three years old, you do not develop post adjudicatively when dividend additions or accumulations are involved. Follow the procedures in SI 01130.300E.

• If the policy does not pay (or is alleged not to pay) dividend additions or accumulations, regardless of age, use the chart in SI 01130.300D.4.b. (in this section) to estimate the CSV and develop the life insurance post adjudicatively.

b. Chart for estimating CSV

Use the following chart to estimate a life insurance policy's CSV (if allowed by SI 01130.300D.4.a., in this section).

EXAMPLE

The claimant alleges owning a 5-year-old life insurance policy with a FV of $2,000. Using the chart for estimating CSV, the estimated CSV is $400 (20% of $2,000).

c. Using the estimated CSV

• If the resource limit (including the estimated CSV) is not exceeded, and the claimant is otherwise eligible, process the claim to payment and verify the CSV post-adjudicatively.

  Do not delay a case solely for CSV information.

• Do not adjudicate until the CSV has been verified if the resource limit is exceeded because of the estimated CSV from the chart in SI 01130.300D.4.b. (in this section).

• Control the case for post-adjudicative development.

• Use the estimated CSV to deny the claim if the resource limit is exceeded without the estimated CSV and conditional benefits do not apply.

E. Procedure to use when evidence is not available

If post-adjudicative verification does not apply:

• Document efforts to verify the life insurance policy on a report of contact or locked MSSICS DROC screen.

• Document the individual’s allegation of ownership, FV, and alleged CSV (if any) on either a signed statement (SSA-795) or a locked DROC.

F. Procedure for accelerated life insurance payments

As a life insurance policy owner may use accelerated payments for food or shelter, these payments are considered income when received and resources if retained into the following month. This transaction is not considered conversion of a resource.

If an individual receives accelerated payments, and the payments do not preclude SSI eligibility due to excess income or resources, determine whether the FV and/or CSV of the life insurance policy must be re-verified.

Re-verify the life insurance policy if, prior to receipt of the accelerated payments:

• the value of the life insurance policy's CSV precluded SSI eligibility, but the individual may now be resource-eligible; or

• the life insurance policy was an excluded resource and its FV reduced the maximum burial fund exclusion available to the individual (For definition of burial insurance, see SI 01130.300B.4.).

If re-verification is necessary, examine the life insurance policy and any other relevant documentation in the policy owner's possession to determine the effect of the accelerated payments on FV and CSV. If necessary, contact the life insurance company for the required information.

If the policy owner expects to receive accelerated payments in the future, explain the effect of any further reduction in the policy's FV on the maximum burial fund exclusion available (if applicable).

G. References

• SI 00830.500, Dividends and Interest

• SI 01130.305, Life Insurance – Effect of Demutualization of Insurance Companies on Countable Resources

• SI 01130.425, Life Insurance Funded Burial Contracts and the Burial Space/Funds Exclusions

• SI 00510.000, Requirement to File for Other Program Benefits – Table of Contents,

• SI 01150.200, Conditional Benefits

• SI 00830.160, Annuities, Pensions, Retirement, or Disability Payments,

• SI 01130.410, Burial Funds Exclusion - August 1, 1990 and Continuing