Appeals court: Lincoln can keep premium paid early by late policyholder

A federal appeals court ruled Thursday that Lincoln does not have to return a pro-rated share of annual life insurance premium fully paid before the policyholder’s death.

The case involves Joan C. Lupe, a New York resident who purchased a universal life policy with a $1.5 million face amount from Lincoln Life & Annuity in 2011. Universal life policy premiums can be structured in any amount at any time, with certain limitations.

Lupe opted to pay Lincoln in the form of an annual “Planned Premium” of $53,877.72. Her policy included a “Coverage Protection Guarantee Rider,” which prevented the policy from lapsing if the money in the policy account was insufficient to cover the monthly deduction, so long as the alternate “Coverage Protection Guarantee Test” outlined in the rider was met.

Andrew Nitkewicz, trustee of the Joan C. Lupe Family Trust, made the 2018 premium payment in May of that year, court documents say. Lupe passed away in October 2018. Upon her death, Lincoln refused to refund any portion of the final premium payment, Nitkewicz claimed in court documents.

Lawsuit lodged

In August 2020, Nitkewicz sued for breach of contract in the Southern District of New York.

Nitkewicz alleged, among other things, that Lincoln Life’s refusal to refund a prorated portion of the annual premium violated New York State insurance law. The relevant portion of the law states that “if the death of the insured occurs during a period for which the premium has been paid, the insurer shall add to the policy proceeds a refund of any premium actually paid for any period beyond the end of the policy month in which such death occurred.”

Lincoln claimed that the annual planned premiums increased the policy value, earned interest, was accessible for a policy loan, withdrawal, or cash surrender, and could have been used to cover future policy expenses.

“As a result,” Lincoln stated, “no premiums paid are ‘unearned’ and they cannot be refunded as part of a policy’s death benefit,” and “there was no ‘unearned premium’ and no refund of premium was payable,” court documents say.

Nitkewicz contrasted Lincoln’s stance with that of Athene Life Insurance Co. of New York. The Lupe trust also owned a $180,000 universal life insurance policy issued by Athene, with a $3,230 planned premium due annually, Nitkewicz said in his lawsuit.

The trust paid the Athene annual premium on June 6, 2018.

“Following the maturity of the policy, after the Trust inquired about the pro-rated refund owed by Athen[e] under New York Insurance Law,” the lawsuit states. “Athen[e] promptly paid the refund owed plus interest ($2,186.34), without any dispute.”

‘A statement of intent’

The district court dismissed the complaint because it concluded, among other things, that the annual premiums are not “actually paid” and are instead “simply a statement of intent” to pay for insurance when the monthly deduction is due.

The court further noted that the annual premiums increase the account value, and in doing so earn interest, and are accessible to the owner.

Nitkewicz appealed to the Court of Appeals for the Second Circuit, where a panel of judges sent a question to the New York State Court of Appeals: “whether a planned payment into an interest-bearing policy account, as part of a universal life insurance policy, constitutes a ‘premium actually paid for any period’ under the refund provision of New York Insurance Law.”

The state court held that the premiums were not “actually paid” for insurance under New York law because “such payments would not necessarily keep the Policy from terminating,” the Second Circuit explained.

Rather, “it was defendant’s monthly deductions that actually ‘paid’ for the insurance because those deductions kept the policy in force for another month,” the state appeals court found. Premiums were not paid “for any period” beyond the end of the policy month in which Lupe’s death occurred since the funds could also be used to cover monthly deductions.

The Second Circuit referenced the state court response as the basis for its decision to affirm the district court’s dismissal of Nitkewicz’s claims.

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