A life insurance policy represents an agreement, linking an insurer with a policyholder. This accord assures that, upon the policyholder’s death, their beneficiaries receive a designated death benefit.
A subset of life insurance policies comes with a maturity date – a predefined point at which the policy culminates, yielding a specific payout to either the policyholder or beneficiaries.
This article unravels the process of a life insurance policy reaching maturity, delves into policies with maturity dates, explores the choices one has when a policy matures, and provides guidance on making decisions at policy maturity.
Types of Policies that Mature
Not all life insurance plans expire. Most term life insurance plans don’t mature. They may be renewed or expire. Permanent life insurance plans, which protect the insured for life if payments are paid, have maturity dates. Policies include entire life, universal life, variable life, and indexed universal life.
Timing of Policy Maturity
The insured’s age and the policy’s issuance date determine its maturity date. Most post-1984 policies mature at 100 or 121. Some older policies mature at 95 or 99.
Options Available When a Life Insurance Policy Matures
- Receiving the Maturity Value: The maturity value of a permanent life insurance policy is normally equal to its cash value or face amount. The cash value is the accumulated savings, while the face amount is the death payout if the insured dies before maturity. Depending on the premiums paid and the cash amount borrowed, the maturity value may be taxable.
- Converting the Policy to an Annuity: Converting permanent life insurance coverage to an annuity is another possibility. This approach may benefit policyholders who seek a consistent retirement income or avoid maturity value taxes.
- Renewing or Extending the Policy: Some permanent life insurance policies may allow the policyholder to renew or extend the policy beyond the original maturity date by paying additional premiums or adding a rider to the policy. This option may be desirable for policyholders who want to keep their coverage in force or who want to leave a legacy for their beneficiaries.
- Surrendering or Canceling the Policy: The final option when a permanent life insurance policy matures is to surrender or cancel the policy and receive the cash value minus any fees or charges. This option may be suitable for policyholders who no longer need or want their coverage or who need cash for other purposes.
Deciding What to Do When a Life Insurance Policy Matures
- Evaluating Financial Goals and Needs: The best option when a life insurance policy matures depends on the financial goals and needs of the policyholder and their beneficiaries. Some factors to consider are: How much income is needed in retirement? How much inheritance is desired for heirs? How much risk tolerance is there for investing? How much liquidity is needed for emergencies or opportunities?
- Understanding Tax Implications: The tax consequences of various life insurance policy maturity choices depend on how much premiums were paid, how much cash value was accumulated, how much was taken or borrowed, and how long the policy remained in existence. Receiving the maturity value as a lump sum may be taxable, converting the policy to an annuity may defer taxes until payments are received, renewing or extending the policy may avoid taxes until death or surrender, and surrendering or canceling the policy may trigger taxes on any gains above premiums paid.
- Consulting with a Financial Advisor: A financial counselor can help you decide what to do when a life insurance policy matures, which may be complicated and costly. Financial advisors may assess choices, examine costs and advantages, and propose the best course of action.
- Considering Estate Planning Considerations: Another factor to consider when a life insurance policy matures is how it affects the estate planning of the policyholder and their beneficiaries. Some questions to ask are: How will the maturity value or the annuity payments be distributed among heirs? How will the maturity value or the annuity payments affect the estate tax liability of the policyholder or their beneficiaries? How will the maturity value or the annuity payments affect the probate process of the policyholder’s estate? How will the maturity value or the annuity payments affect the creditor protection of the policyholder or their beneficiaries?
When their term ends, life insurance plans pay out a specific sum to the policyholder or beneficiaries. Permanent life insurance products like whole life, universal life, variable life, and indexed universal life commonly do this.
A life insurance policy’s maturity value may be received, converted to an annuity, renewed or extended, or surrendered or canceled.
The policyholder and recipients’ financial objectives, tax consequences, financial counsel, and estate planning determine the best solution. Thus, a life insurance policy’s maturity date must be known and planned for.