Life Insurance At 100: What Happens To Your Policy?

Life insurance is designed to provide financial security for your loved ones after you pass away. But what happens when you reach the age of 100? This is a question that many policyholders are asking, especially those with whole life insurance policies. Whole life insurance is a type of permanent insurance that covers the policyholder for their entire life, as long as premiums are paid. However, some of these policies are written to expire at the age of 100, leaving policyholders unsure about their coverage and benefits. In this article, we will explore what happens to life insurance when the owner reaches the age of 100, including the options available to those with whole life insurance policies.

Whole life insurance policies mature at 100

Whole life insurance policies are permanent policies that accrue cash value over time. They are designed to remain in effect for the entirety of the insured's life, providing peace of mind by ensuring financial support for loved ones in the event of the policyholder's death. Whole life insurance is the most common type of life insurance policy, offering numerous benefits such as the ability to build cash value over time. However, the premiums tend to be substantially higher than those of term life insurance policies, making whole life insurance unsuitable for everyone.

Whole life insurance policies are comprised of two main components: the death benefit and the cash value. The death benefit is a fixed amount that is paid out to beneficiaries upon the insured's death, covering final expenses and lost income. The cash value component of a whole life insurance policy accumulates over time, tax-free, and can be accessed through loans or other means. The policyholder can borrow against the accumulated cash value, using it as collateral. However, if the loan is not repaid with interest, the death benefit will be reduced.

Whole life insurance policies are designed to mature when the insured reaches the age of 100. At this point, the payments end, and the cash value and face amount become equal. The beneficiary then receives the face amount as a payout, even if the insured is still alive. This maturity age of 100 is known as the "policy anniversary nearest age 100" and can result in the policy becoming a "matured endowment." With modern whole life policies, the maturity age has been increased to 120 to preserve the tax-free nature of the death benefit.

The approach of the maturity age can cause concern for policyholders, especially if they have been paying into the policy for decades. In such cases, adding a Maturity Extension Rider (MER) to the existing policy or exchanging it for a new policy with a longer maturity age can be a solution. Consulting with a financial advisor is recommended for policyholders approaching the maturity age of their whole life insurance policy.

Death benefits are paid to beneficiaries

When a policyholder dies, their beneficiaries will receive a death benefit payout from their life insurance policy. This is the primary purpose of life insurance and how policies are described, with the value of the policy corresponding to the death benefit.

Designating Beneficiaries

A beneficiary needs to be specifically designated in the life insurance policy, and there can be more than one beneficiary. A beneficiary doesn't have to be a person, it can also be an entity such as a charity, family trust, or business. An heir is not necessarily the same as a life insurance beneficiary, and underage children cannot ordinarily be named as beneficiaries. If you want to leave money to a minor, you may need to set up a trust to manage the financial payout until they are of age.

Changing Beneficiaries

When you buy an insurance policy, you can designate each beneficiary as either revocable or irrevocable. For revocable beneficiaries, the change process is relatively easy, and you don't need permission unless it's your spouse and you live in a common-property state.

Allocating Benefits

The policyholder can allocate different percentages to different beneficiaries. For example, if there are four beneficiaries, the policyholder doesn't have to split the death benefits evenly between them but can choose to give more or less to each beneficiary.

Using the Payout

Beneficiaries can use the death benefit payout any way they want. There are no stipulations or conditions on benefit payouts. They can take the lump sum and use it for living expenses, education, retirement savings, or even going on vacation.

Taxes

Generally speaking, life insurance death benefits are exempt from income tax. However, you should consult a tax advisor if you receive a death benefit payment.

Accelerated Death Benefit

Many life insurance policies have an Accelerated Death Benefit rider that allows policyholders with a terminal illness to access part of the death benefit amount while they are still alive. This will typically reduce the amount disbursed to beneficiaries after death.

Decreased Benefit

While reputable companies have a long history of paying out insurance death benefits in full, there are some situations in which a death benefit may be reduced. This includes if an Accelerated Death Benefit was provided, if the policyholder misrepresented their information during the application process, if there were outstanding loans against the cash value, or if the policy had an adjustable death benefit.

Policyholders can withdraw cash value

Whole life insurance policies are permanent and remain in force for the entire life of the insured as long as the premiums are paid. Whole life insurance policies are also known as cash value insurance because they accrue cash value over time. This cash value is accumulated on a tax-free basis at a fixed interest rate. This money can be accessed through loans or other means.

The cash value of a whole life insurance policy can be withdrawn in the form of a loan or used to cover insurance premiums. All loans must be repaid before the insured passes away, otherwise, they will be deducted from the policy's death benefit. The cash value can also be used to pay premiums.

The cash value of a whole life insurance policy is generated when premiums are paid. The more premiums that have been paid, the more cash value there is. The main benefit of cash value is that it can be withdrawn in the form of a policy loan.

If a policyholder has been paying premiums for many years and has an unexpected medical bill or financial obligation, they can contact their insurance company to see how much they can withdraw from their policy. As long as the loan and any interest are repaid, the policy's full coverage amount will be paid out to the beneficiary. If the loan isn't repaid, the death benefit will be reduced by the outstanding balance of the loan.

Withdrawing cash value from a whole life insurance policy can have tax implications. While the cash value of a whole life policy grows tax-free, accessing that money can result in a tax bill. A whole life policy's cash value is made up of the premiums paid and the cash accumulated through interest (investment gains). The total amount of money paid through premiums is known as the policy basis. This amount is not considered taxable. For example, if a policyholder has paid $15,000 in premiums but their policy's cash value is $17,500, only the amount above $15,000 ($2,500) is considered taxable as it represents investment gains.

Policyholders can surrender their whole life insurance policy and collect the accumulated cash value. This is a common practice for those who wish to use the policy for supplemental retirement income. However, surrendering the policy removes the death benefit as coverage is no longer in place.

Life insurance can be used as an investment vehicle

Life Insurance as an Investment Vehicle

Permanent life insurance policies, on the other hand, often include a cash value component that grows tax-free and can be borrowed against or withdrawn. While this may seem appealing, there are several drawbacks that make it a less attractive investment option.

Firstly, permanent life insurance policies tend to have much higher premiums than term life policies. This means that unless you specifically need lifelong coverage, you may be paying unnecessarily high premiums.

Secondly, the investment returns on permanent life insurance policies are often lower than those of other investment options. For example, brokerage accounts, education accounts, and retirement savings plans like IRAs and 401(k)s typically offer higher returns than the cash value of a life insurance policy.

Thirdly, permanent life insurance policies often come with additional fees and penalties that can eat into your returns. These include administrative fees, reduced death benefits when you withdraw from the cash value, policy lapse if you miss a premium payment, and significant fees for withdrawing during the surrender period.

Finally, it's important to consider the primary purpose of life insurance, which is to provide financial security for your loved ones in the event of your death. If this is your main goal, term life insurance is a more affordable and effective option.

However, there are a few specific instances where using permanent life insurance as an investment may be beneficial. For example, if you have assets that will be subject to estate tax, a permanent life insurance policy can help offset these costs since the death benefit is tax-free for beneficiaries. Additionally, if you have lifelong dependents, such as children with disabilities, permanent life insurance can ensure they always have a financial safety net.

In summary, while life insurance can technically be used as an investment vehicle, it is generally not the best option due to high costs and low returns. Term life insurance combined with standalone investment accounts is often a more flexible and profitable strategy. However, there are certain circumstances where permanent life insurance can be a useful tool for tax and estate planning, as well as providing lifelong coverage for dependents.

Term life insurance vs whole life insurance

Term life insurance and whole life insurance are two types of life insurance policies with distinct features and benefits. Here is a detailed comparison between the two to help you understand their differences and make an informed decision based on your needs:

Term Life Insurance:

• Policy Length: Term life insurance provides coverage for a specific period, typically ranging from 10 to 30 years. If the policyholder dies during this period, their beneficiary will receive a payout. However, if the policyholder outlives the term, the coverage ends, and there is no payout.
• Cash Value: Term life insurance does not accumulate cash value over time. It solely focuses on providing coverage for a fixed term, and there is no option to borrow or cash out the policy.
• Cost: Term life insurance is generally the most affordable option among life insurance policies. The cost is lower because there is only a payout if the policyholder dies during the specified term.

Whole Life Insurance:

• Policy Length: Whole life insurance, as the name suggests, provides coverage for the entire life of the policyholder. It typically covers until the policyholder reaches a certain age, such as 90, 100, or even 120 years old.
• Cash Value: Whole life insurance includes a cash value component. A portion of the premiums paid goes towards building cash value, which grows over time at a guaranteed rate set by the insurer. This cash value can be borrowed against or surrendered for cash.
• Cost: Whole life insurance is significantly more expensive than term life insurance due to its lifelong coverage and the accumulation of cash value. The higher premiums reflect the long-term nature of the policy and the potential for cash value growth.

Pros and Cons:

Term Life Insurance:

Pros:

• Customizable: You can choose the length of coverage based on your specific needs.
• Affordable: Term life insurance usually costs less than whole life insurance, making it a budget-friendly option.

Cons:

• Limited Coverage: If you outlive the term, your coverage ends, and there are no benefits.
• No Cash Value: Term life insurance does not accumulate cash value like an investment account.

Whole Life Insurance:

Pros:

• Consistent Premiums: The premiums remain the same throughout your life, providing predictability.
• Guaranteed Payout: The death benefit is guaranteed (subject to limitations and exclusions), ensuring peace of mind.
• Growing Cash Value: The cash value of your plan grows at a constant, guaranteed rate, offering financial flexibility.

Cons:

• Lack of Choice: You cannot choose the length of the policy; it is typically designed to cover your entire life.
• Higher Cost: Whole life insurance is generally more expensive than term life insurance due to its lifelong coverage and cash value component.

Choosing the Right Option:

When deciding between term and whole life insurance, consider your financial goals, coverage needs, and budget. Term life insurance is ideal for those who only need coverage for a specific period, such as while raising children or paying off a mortgage. It is also a good choice for those on a budget who want affordable coverage. On the other hand, whole life insurance is suitable for individuals seeking lifelong coverage and interested in building cash value over time. It is a more expensive option but offers the advantage of guaranteed payouts and growing cash value. Ultimately, the decision should be based on your unique circumstances and financial priorities.

Frequently asked questions