Life Insurance: Maturing And Your Benefits

Life insurance with maturity benefits is an option for those who want to get more out of their policy than just death coverage. This type of insurance is designed to help you achieve your life goals, such as paying for your child's education, their wedding, or going on a family vacation. It is a versatile financial tool that offers flexibility in terms of payment and choices, and it can also provide potential tax benefits. When a life insurance policy matures, it has reached its maturity date and now owes the cash value or death benefit to the insured. The maturity date typically falls between the ages of 95 and 121, and it is important to be aware of your options before this date arrives.

Maturity date extensions

Maturity extension riders (MERs) are a provision in a life insurance policy that extends the maturity date or expiration date of the policy past the original date issued. This means that the policy will continue to provide coverage for the policyholder even after they reach the original maturity date. MERs are typically offered as an optional add-on to life insurance policies and can be a valuable way to ensure that your policy will continue to provide coverage for as long as you need it.

There are a few different ways that maturity extension riders 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. The cost of a maturity extension rider will vary depending on the type of rider and the insurance company. It is important to factor in the cost of the rider when you are comparing different policies.

Maturity extension riders can provide peace of mind, knowing that your policy will continue to provide coverage for as long as you need it. This can be especially important if you are concerned about outliving your policy. They are typically terminable, meaning that you can cancel the rider at any time.

If you are considering purchasing a maturity extension rider, it is important to talk to your insurance agent to understand the specific terms and conditions of the rider. This will help you make an informed decision about whether or not a maturity extension rider is right for you.

It is worth noting that maturity extension riders may need to be elected years in advance, depending on the policy. Therefore, it is important to be aware of your options well before your policy's maturity date arrives.

Whole life insurance maturity

Whole life insurance is a type of permanent life insurance policy that remains in force for the insured's entire lifetime, provided that the required premiums are paid. It is also known as "straight life" or "ordinary life". Whole life insurance policies have a maturity date, which is usually set at ages 95, 100, or 121—ages that only a few people will reach.

When a whole life insurance policy matures, it owes the cash value or death benefit to the insured. If the insured lives to the maturity date, the policy will pay the cash value amount in a lump sum to the owner. The maturity value to be paid out is specified in the contract and may be equal to the cash value of the policy or the face amount.

For policies issued prior to 2009, it is not unusual for the maturity date to be set at the insured age of 90, 95, or 100. However, with modern whole life policies issued since 2009, maturity ages have been increased to 120. This increase in maturity age has the advantage of preserving the tax-free nature of the death benefit. In contrast, a matured endowment may have substantial tax obligations.

If the insured lives to the maturity date, the policy will pay the cash value amount in a lump sum as an endowment to the insured. This cash value is adjusted so that it equals the death benefit upon maturity. However, it is important to note that without a maturity extension available in the contract, a taxable event will occur.

To avoid this taxable event, policyholders can purchase a maturity date extension rider (MER) that keeps the policy in force until the rider is terminated or until the death of the insured. It is important to be aware of the options and plan accordingly, as some riders need to be elected years before the maturity date.

Universal life insurance maturity

Universal life insurance is a form of permanent insurance, which means that coverage can last for your lifetime as long as you pay your premiums. It is often compared to whole life insurance, which is also permanent but is less expensive and has more options. Universal life insurance is also different from term life insurance, which only covers the insured for a set period, such as 10 or 20 years.

Universal life insurance policies mature when the policyholder reaches a certain age, typically between 85 and 121. This age is known as the "maturity date". If the policyholder survives to the maturity date, they may receive a maturity payment, and the policy will end. The maturity payment may be the full death benefit or the cash value amount, depending on the policy. It's important to note that the proceeds from a matured policy may be taxable.

The maturity date of a universal life insurance policy can be a concern for some policyholders, especially if they have used most of the cash value to pay premiums. If the policyholder lives past the maturity date, they could be left with no coverage and little money returned to them. This is why it's important to choose a policy with a maturity date that aligns with your reasons for purchasing coverage. For example, if you want to ensure your family won't have to pay inheritance taxes when you die, you should set a very high age for the maturity date.

Universal life insurance policies come with a maturity extension clause, which specifies the final resolution of the contract once death occurs. There are different types of maturity extension provisions, and it's important to understand what is provided in your contract. Some universal life insurance policies have supplemental coverage, which increases the total death benefit. If the maturity extension specifies only the base death benefit, this supplemental coverage will be lost if the insured survives past the maturity date.

In conclusion, while universal life insurance offers lifelong coverage and flexibility, it's important to be aware of the potential risks associated with the maturity date. Choosing a suitable maturity date and understanding the maturity extension provisions in your contract can help ensure that you and your loved ones are adequately protected.

Tax implications of matured life insurance

When a life insurance policy matures, it has reached its maturity date and the insured person is owed the cash value or death benefit. The maturity date is the age at which a permanent life insurance policy ends, typically between 95 and 121 years old. The maturity date of a life insurance policy is important because a portion of the cash value paid out may be subject to income tax. This can be a large amount, and beneficiaries may receive less of an inheritance or none at all.

In the context of life insurance, the benefit is that you never experience negative tax consequences until you surrender the policy for its full cash value. The only portion of the cash value that is taxable is the gain, which is calculated by subtracting investment earnings inside the policy from an amount of cash value equal to the total amount of premiums paid. You are assessed ordinary income tax on the amount of your gain, regardless of the source of investment interest inside the policy.

However, taxes are not always due on a life insurance policy when it matures. For term policies, there are no tax consequences. When the policy matures, you may renew it or allow it to lapse without triggering any tax effect. Permanent life insurance, such as whole life, will also not trigger any tax consequences as long as you keep the policy in force.

Endowment income, which is the amount of an endowment less the premiums paid by the insured, is considered a form of regular income and is taxed at that rate. Life insurance benefits, on the other hand, are not considered taxable. Most people who purchase whole and universal life insurance policies expect to pass away before their policies mature, and the beneficiaries are then paid benefits that are tax-free. If the insured person lives past the maturity date, they will receive endowments, which are reduced through taxes.

According to the Union Budget 2023 in India, payouts from life insurance policies (excluding ULIPs) issued after April 1, 2023, will be taxable if the total annual premium exceeds Rs. 5 lakhs. Additionally, if the amount received from a life insurance policy is more than Rs. 1 lakh on policies not covered under an exemption, then TDS (Tax Deducted at Source) at 5% shall be deducted by the insurer before making the payment. TDS will also be deducted on bonus payments.

Maturity benefits

There are different types of life insurance policies, and not all of them offer maturity benefits. When choosing a life insurance policy, it is crucial to evaluate your financial needs and select a plan that suits your specific circumstances and goals. Here are some common types of life insurance policies that do offer maturity benefits:

• Term Insurance Plan with Return of Premium (TROP): While term plans typically do not offer maturity benefits as they are pure protection plans, some term plans will offer a return of premiums if you survive the policy term. In this case, the maturity amount is equal to the premiums paid.
• Guaranteed Income/Savings Plan: Savings plans, such as the Canara HSBC Life Insurance iSelect Guaranteed Future plan, offer life cover along with guaranteed returns at maturity. For example, if you pay ₹20,000 per month for 10 years, you will be covered for 20 years, and at the end of the 20th year, you will receive a maturity benefit of ₹66.93 lakhs. These plans can also help build a corpus for your retirement.
• Unit Linked Insurance Plans (ULIPs): ULIPs are market-linked insurance plans where a portion of the premiums is used for life cover, and the remainder is invested in market-linked investment options. ULIPs provide a maturity benefit if you survive the policy term. The maturity benefit is equal to the fund value, which can vary depending on market performance.

It is worth noting that the maturity benefit of a life insurance policy is usually taxable, but there may be exemptions under certain sections of tax laws, such as Section 10(10D) in India.

Frequently asked questions