Whole life insurance can be a bit of a contradiction. As the name would suggest, it’s designed to cover you for your whole life, in contrast to term insurance policies that have an expiration date after a certain number of years. However, your whole life policy does have a maturity date, which you have the ability to outlive. So truth be told, whole life insurance may NOT cover your whole life.
This maturity date is often set at 95 or 100 years of age for whole life policies, but some policies have maturity dates as high as 120 years of age.
What happens when you outlive your policy? There are several things that could happen, depending on how your policy is constructed – but to understand them, it is important to review how whole life insurance works.
Premiums for a whole life policy have two components – the cost of insuring you, based on your actuarial risk at the time of purchase, along with an overage to be used for investment purposes (known as the cash-value). Your premiums stay the same, but as you age, a larger percentage of your premium is directed toward the cost of insuring you (since the older you are, the higher your risk of death) and less toward the cash-value. At maturity, the cash value of the policy equals the death benefits (the face value of the contract).
Similar to a mortgage, where there is a tiny amount of interest left to pay with your last principal payment, there is a tiny amount of cash-value to pay with your last insurance payment. After that last payment, the cash value now equals the amount you were insured for – the death benefit. Since the insurance policy ends at that point, you now receive that value in cash.
That's great, right? It is, except at that point it is no longer a life insurance product, it is a disbursement to you because of the involuntary ending of the contract (albeit for a good reason – you are still alive). Therefore, it is mostly taxable income – and most likely at a high rate, given the size of most death benefits.
Some policies offer a way out of this by offering policy maturity extension riders that extend the term until your death. The intent of these riders is to keep the policy’s status as an insurance-based death benefit instead of a taxable disbursement. The death benefit typically becomes the cash value you would have accepted at age 100 plus accumulated interest, with no new payments.
If you have variations of a whole life policy such as Universal Life and Variable Life, the situation gets considerably more complicated. Depending on the policy you have, you may be able to control aspects of the investment of the cash value component (investing it in riskier, higher growth stocks) or the ability to adjust the amount of the death benefit.
While this can work to your advantage in some aspects, it severs the connection between the death benefits and the cash-value at maturity. With these adjustments, there is no guarantee that the cash value equals the death benefits – in reality, they are almost guaranteed not to. It would be an incredible coincidence if they did. How this is handled at maturity, and whether or not there is a maturity extension rider available depends on how your policy is written.
Check the details of your policy, and then it's up to you – would you rather have a maturity extension rider, or throw yourself the best 100th birthday party in history?
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