Life Insurance: Maturity Before Death?

Life insurance is a crucial financial safety net for loved ones in the event of the policyholder's death, but what happens when a policy matures before the insured passes away? This scenario is indeed possible, and it's important to understand the implications. When a life insurance policy matures, it essentially reaches its expiration date, and the coverage comes to an end. This means that if the insured person dies after the maturity date, there will be no death benefit paid out to the beneficiaries. However, the policyholder may receive a maturity benefit or payout, which is typically a lump-sum payment that includes the premiums paid up to that time and any additional benefits offered by the insurance company.

Maturity date extension riders (MERs)

The maturity date of a life insurance policy is important as it can cause issues for the insured person. When a policy matures, coverage terminates and the maturity value, which may be the face amount, is distributed to the policy owner. This can result in the insured person losing their life insurance coverage before their death, leaving beneficiaries with less or no inheritance. Additionally, a portion of the cash value paid out is taxable to the policy owner.

MERs can be a valuable solution to this problem, as they can delay the policy maturity date. There are a few different ways MERs can work. Some riders simply extend the maturity date by a set number of years, while others allow the policyholder to choose when they want the policy to mature. MERs can provide peace of mind, knowing that your policy will continue to provide coverage for as long as you need it.

It is important to note that MERs can add to the cost of your life insurance policy. They are typically terminable, meaning you can cancel the rider at any time. If you are considering purchasing an MER, it is recommended to speak with your insurance agent to understand the specific terms and conditions of the rider.

Permanent life insurance policies

One key advantage of permanent life insurance is that it builds up a tax-deferred cash value over time, which can be accessed through withdrawals, loans, or by surrendering the policy. This cash value is designed to offset the rising cost of insurance as the insured person ages. Permanent life insurance policies also have a maturity date, which is expected to be after the insured person dies, typically ranging from 95 to 121 years old.

There are four main types of permanent life insurance policies: whole life insurance, universal life insurance, variable life insurance, and indexed life insurance. Whole life insurance offers a fixed premium and death benefit, along with a cash value component that can be used for loans or paying premiums. Universal life insurance has flexible premiums and allows the policyholder to choose between a level or increasing death benefit. Indexed universal life insurance lets the policyholder earn a fixed or equity-indexed rate of return on the cash value, while variable universal life insurance allows the policyholder to invest the cash value in separate accounts.

When a permanent life insurance policy matures, the insurer will issue a payout, and the coverage will end. The payout amount depends on the specifics of the policy and can be equal to the face amount or the accumulated cash value. It is important to note that the amount exceeding the invested amount may be subject to income tax.

To prepare for a policy's maturity, individuals should contact their insurance company to understand the maturity date, payout amount, taxes, and any outstanding loans that may impact the payout. Additionally, it is crucial to share this information with trusted family members or financial advisors to ensure proper decision-making, especially if the policyholder is alive but lacks the mental capacity to make critical choices.

Term life insurance policies

Term life insurance is the simplest and purest form of life insurance. It is a contract between the policy owner and the insurance company. The owner agrees to pay a premium for a specific term, and in return, the insurance company promises to pay a specific death benefit to the beneficiary upon the death of the insured. Term life insurance policies typically last between 10 and 30 years, and the premium stays the same for the entire term.

There are several types of term life insurance policies, including level term, yearly renewable term, and decreasing term. Level term insurance is the most common type, with a fixed monthly payment and death benefit. Yearly renewable term policies are one-year policies that can be renewed each year without a medical exam, but at a higher cost. Decreasing term policies have a death benefit that declines each year according to a predetermined schedule, while the policyholder pays a fixed premium.

When purchasing a term life insurance policy, the insurance company will assess the policyholder's risk through an "underwriting" process, which includes a medical exam and questions about their occupation, lifestyle, and hobbies. The cost of term life insurance premiums will depend on factors such as age, gender, health, and life expectancy.

Term life insurance is a good option for people who want substantial coverage at a low cost, such as young people with children or growing families. It provides peace of mind and financial protection for loved ones in the event of the insured person's death during the specified term.

Endowment policies

Endowment life insurance is a combination of life insurance and a savings plan. It is a temporary type of life insurance that does not last the whole of an insuree's life. Instead, the insuree chooses how long they want the policy to last, known as the term. This could be a set number of years or until they reach a target age.

There are two main types of endowment life insurance plans: traditional with-profits and unit-linked. With both types of policies, the value varies with the underlying investments, but the mechanism by which growth is allocated varies. The sum insured remains payable on death or other insured events.

With a traditional with-profits endowment, there is an amount guaranteed to be paid out, known as the sum assured. This can be increased based on investment performance through the addition of periodic bonuses. Regular bonuses are guaranteed at maturity, and a further non-guaranteed bonus may be paid at the end, known as a terminal bonus.

Unit-linked endowments are investments where the premium is invested in units of a unitised insurance fund. Units are encashed to cover the cost of life assurance. Policyholders can often choose which funds their premiums are invested in and in what proportion. Unit prices are published regularly, and the encashment value of the policy is the current value of the units.

Endowment life insurance is generally more expensive than permanent life insurance, especially if the policy is to be paid off in a few years. However, it offers a guaranteed return and payout, and combines life insurance with savings.

Whole life insurance

• Lifetime coverage: Whole life insurance provides coverage for the entire life of the insured person, rather than a specific number of years.
• Cash value component: Whole life insurance includes a savings component, known as the cash value, which the policy owner can draw on or borrow from. This cash value accumulates over time and can be used for various purposes, such as large purchases or supplementing retirement income.
• Fixed premiums: Most whole life policies have level premiums, meaning the amount you pay each month remains the same throughout the duration of the policy.
• Guaranteed death benefit: The death benefit amount is established when you sign up for the policy and remains the same as long as the policy is active.
• Tax advantages: Interest accrues on a tax-deferred basis, and withdrawals up to the total amount of premiums paid are tax-free. Additionally, death proceeds are non-taxable for the beneficiary.
• Level Payment: Premiums remain unchanged throughout the policy duration. This is the most common type of payment plan.
• Single Premium: The insured pays a one-time large premium that funds the policy for life. This type of policy is usually a modified endowment contract, which has tax consequences.
• Limited Payment: The insured pays a limited number of premiums, which are higher than in a level-payment policy.
• Modified Whole Life Insurance: This type of policy offers lower premiums than a standard policy in the first two to three years, and higher-than-standard premiums in the later years.

Frequently asked questions