What to do when a Northwestern Mutual account holder dies

The death benefit itself is generally tax-free; the interest on it is not. Northwestern Mutual explains it directly: "While the death benefits from a life insurance contract are generally tax-free, interest may be paid from the date of death until the claim is settled. The IRS requires that we report the interest you earned on Form 1099-INT." So the longer a claim takes to settle, the more interest accrues and the larger that 1099-INT will be. The principal is not taxable income, only that interest. Hand the 1099-INT to whoever is preparing the final income tax returns. This is different from an annuity death benefit, where the gain in the contract is reported on a Form 1099-R and is generally taxed as ordinary income.

You do not — there is no death claim to file. Disability income insurance has no death benefit. It replaces a portion of the insured's income while the insured is alive and cannot work, and it stops at death. Northwestern Mutual is one of the largest disability income writers in the country, so executors turn these policies up constantly and reasonably assume they pay something. They do not. Two things can still matter: benefit payments that had accrued but were not yet paid at the date of death may be owed to the estate, and a waiver-of-premium benefit attached to a LIFE policy or annuity is claimed through the disability process (1-800-748-9493, ext. 6612016). The same is true of a standalone long-term care policy — no death benefit. The exception is the hybrid product, Whole Life Insurance with Long-Term Care Benefit, which does pay a death benefit, reduced by any long-term care benefits already used.

Three things, and the third is the one people miss. First, the trust must exist and have its own EIN before it can own the policy; Northwestern Mutual does not create trusts, so an estate attorney drafts the ILIT. Second, you request the change of ownership paperwork from your financial representative — Northwestern Mutual does not publish an ownership change form on its public site — and submit it with a Certification of Trust, the full legal trust name, the date it was established, and the trustee. Third, and this is the failure point: CHANGING THE OWNER DOES NOT CHANGE THE BENEFICIARY. An ILIT that owns the policy but was never named as its beneficiary will not receive the proceeds. The Beneficiary Change form is a separate submission. Two timing points specific to Northwestern Mutual: transferring an EXISTING policy starts the three-year lookback of IRC 2035, so if the insured dies within three years the death benefit is pulled back into the taxable estate (a policy the trust buys new is not), and because Northwestern Mutual whole life dividends buy paid-up additions that raise the death benefit over time, the trust will typically receive more than the original face amount — while an outstanding policy loan quietly reduces it.