What Happens If I Outlive My Whole Life Insurance Policy?
What happens financially when a whole life insurance policy matures and the insured is still alive?
Whole life insurance provides lifelong coverage and includes a cash value component that grows over time. This type of policy is designed to offer financial security to beneficiaries upon the insured’s passing. While most whole life policies pay out a death benefit to heirs, a unique situation arises when the insured individual lives long enough for the policy to reach its contractual maturity date. This scenario means the policyholder “outlives” the insurance coverage in its traditional sense, leading to specific outcomes for the policy and its value.
Understanding Whole Life Policy Maturity
A whole life insurance policy reaches “maturity” when its accumulated cash value equals the policy’s death benefit, also known as the face amount. This is a pre-determined contractual event outlined in the policy. Historically, policies matured around age 100, but newer policies set the maturity age at 120 or 121 years due to increased longevity. When a policy matures, the insurance contract has fulfilled its primary obligation, as the cash value has grown to match the death benefit. This scheduled event triggers the next phase of the policy’s life cycle.
Receiving the Maturity Payout
When a whole life policy reaches its maturity date while the insured is still living, the insurance company pays the policy’s face amount directly to the policyholder. This payment is an “endowment.” The payout concludes the insurance contract, as the policy has delivered its full contractual value to the living insured. This means the policy no longer provides a death benefit to beneficiaries. The policyholder receives the accumulated value.
Tax Implications of the Payout
Unlike a death benefit, which is received income-tax-free by beneficiaries under Internal Revenue Code Section 101, an endowment payout to a living policyholder is subject to income tax. The taxable portion is the amount exceeding the policy’s “cost basis.” The cost basis represents the total premiums paid into the policy, minus any tax-free withdrawals or dividends taken.
For example, if a policyholder paid $50,000 in premiums and receives a $100,000 maturity payout, the $50,000 gain is taxable. This gain is taxed as ordinary income. The insurance company issues an IRS Form 1099-R to report this distribution.
Options Before Policy Maturity
Policyholders have several options to manage their whole life insurance policy’s value before it reaches its contractual maturity date:
Surrendering the policy: Canceling coverage for its cash surrender value (cash value minus surrender charges or outstanding loans). Any amount received above the cost basis is taxable as ordinary income.
Taking policy loans: Loans are not taxable income if the policy remains in force and the loan amount does not exceed premiums paid. Interest accrues, and outstanding loans reduce the death benefit or maturity payout if not repaid.
Receiving dividends (for participating policies): Dividends are a return of unused premium, not taxable unless total dividends exceed total premiums paid. They can be taken in cash, used to reduce future premiums, or applied to purchase paid-up additions, increasing cash value and death benefit.
Selling the policy in a life settlement: The policy is sold to a third party for an amount greater than its cash surrender value but less than the death benefit. Proceeds are taxable: tax-free up to cost basis, ordinary income between cost basis and cash surrender value, and capital gain for amounts exceeding cash surrender value.