Since we are living longer it is a good idea to understand what it means for a life insurance policy to mature (also called endow)to reduce any tax or other consequences that may come up. Most whole life insurance policies have a maturity date of anywhere between 80-121 depending on how long ago it was issued, what for, and the company it was from.
Simply speaking: a whole life insurance policy matures when the benefit amount has accrued and then ceases to operate.
This works differently for each type of life insurance which we’ll outline below.
Term life insurance matures
With term insurance, the maturity date is a predetermined period of, typically, 10-30 years. In large part term policies never pay out a benefit as the insured lives past the maturity date, and unless you have riders to reissue the policy then it will expire.
When whole life insurance policies mature
Whole life policies have cash value and a death benefit that is linked to each other. When insured life past the maturity date in the policy then the cash value is paid in a lump sum amount to the owner. Typically when a whole life policy matures it also means that the cash value in the policy equals the death benefit.
While we all think a windfall of money would be a great situation, there are consequences that can occur tax-wise that sometimes cause challenges if not prepared.
Universal life policy matures
These policies offer more flexibility with the premium as well as the death benefit amount and while that can be a great thing, this can cause its maturity to be trickier than whole life.
Maturity dates
For policies written before 2009 older mortality tables were used from the 1980s or even back to the 1950s which put the life expectancy of individuals lower than the tables used now. This means that the maturity age for these policies can be age 100 or less. Current mortality tables often have mortality ages of 121 or perhaps longer.
The significance of this is that those living past the policy’s maturity date not only now have a taxable event, but they also lose the tax-favored benefits that the policy provided after making lifelong premium payments.
Extension clauses
One way to help avoid a taxable event is to make sure that the policy has a maturity extension in the contract. For universal life policies, this is even better because the policy minimizes the cash value portion. There are a number of different options possible.
The one to avoid, unless you don’t find it important, is the “not maturity extension”. Self-explanatory.
The other options available are total death benefit and cash value, greater death benefit or cash value, and base death benefit, and cash value.
Tax implications
When a policy matures or endows, the endowment income equals the endowment less the premiums paid by the insured. It is considered regular income for tax purposes. On the whole, most people expect to pass away before making it to the maturity date, and benefits from a death benefit are tax-advantaged. Most insurance companies suggest that a policyholder extend their policy instead of going through the lump sum endowment and associated tax consequences.
Getting a lump sum could put you into a higher tax bracket for the year, also if you have loans then you would come out with less than the total cash value.
Final words
Deciding what to do with your policy is a personal choice that should be carefully determined based on what you foresee for your future. Most policies have a maturity date anywhere between 95 and 121. If the policyholder makes it to that date then they will collect a benefit of the cash value and will need to pay taxes. Speaking with a life insurance agent may help in deciding what to do.