What Happens When a Life Insurance Policy Matures?

Understanding Life Insurance Policy Maturity

A life insurance policy matures when its cash value equals its face amount, resulting in a payout to the policyholder. This event marks the end of the policy’s contractual term, transforming it from a protective instrument into a financial asset.

Understanding Policy Maturity

Policy maturity is an event primarily associated with permanent life insurance policies. It signifies the end of the policy’s contractual period, when the insurer pays out the value to the policyholder. This differs from the death benefit, which is paid to beneficiaries upon the insured’s passing.

Whole Life Policies

For whole life policies, maturity typically occurs at a specified advanced age, often age 100 or 121. The policy’s cash value is designed to equal its face amount, and the sum is then paid to the policyholder. If the policyholder is still living, the policy “endows,” meaning the death benefit ceases, and the policy owner receives the cash value.

Endowment Policies

Endowment policies are designed to mature at a predetermined date, such as 10, 20, or 30 years after issuance. These policies combine a savings component with life insurance protection, providing a lump sum payout to the policyholder if they survive the term. If the insured dies before maturity, the death benefit is paid to beneficiaries, but if they live, they receive the maturity benefit, which includes the sum assured plus any accrued bonuses.

Universal Life Policies

Universal life policies also have maturity dates, though their timing varies based on cash value growth. These policies often mature at an advanced age, such as 105, 118, or 121, but some can mature earlier. Upon maturity, the policyholder typically receives a payment, which may be the full death benefit or cash value, and the coverage ends.

Term Life Insurance

Term life insurance policies do not “mature” like permanent policies. They have an expiration date, and if the insured outlives the policy term, the coverage ends without a cash value payout to the policyholder. While some term policies, like “Return of Premium” riders, may offer a refund of premiums paid if the insured survives the term, this is a specific feature, not a standard maturity benefit.

Face Amount vs. Cash Value

The “face amount” or “death benefit” is the sum the insurer pays to beneficiaries upon the insured’s death. The “cash value” is a savings component that accumulates within permanent policies. At maturity, the cash value becomes the payout amount to the policyholder, rather than the original death benefit.

Options for Receiving Maturity Proceeds

When a life insurance policy matures, the policyholder has options for receiving funds. The most common choice is a lump-sum payment of the maturity benefit. This provides immediate access to the full amount, which can be used for various financial goals, such as debt repayment or investment.

Annuitization

Another option is annuitization of the proceeds. This involves converting the maturity benefit into a stream of income payments, similar to an annuity. Payments can be structured to occur monthly, quarterly, or annually over a period or for life. This option provides a steady income stream, which can be beneficial for retirement planning or living expenses.

Leaving Funds with the Insurer

Some insurers may allow policyholders to leave funds with them, potentially earning interest. This option is less common for maturity payouts and may not always be available. Any interest earned on funds held by the insurer may be subject to taxation.

Tax Implications of Maturity Payments

The tax treatment of life insurance maturity proceeds is an important consideration. The portion of the payout representing the “cost basis” – the total premiums paid – is received tax-free, as it is considered a return of the policyholder’s original investment.

Any amount received above the cost basis is typically considered taxable income. This gain, representing the interest or investment growth earned on the policy’s cash value, is usually taxed as ordinary income. For example, if a policyholder paid $50,000 in premiums and receives a $70,000 payout, the $20,000 gain would likely be subject to income tax.

While death benefits are generally tax-exempt for beneficiaries, maturity benefits paid to the policyholder may be taxable if they exceed the cost basis. Policyholders should consult a qualified tax professional for personalized advice.

Claiming Your Maturity Benefits

When a life insurance policy approaches maturity, the insurance company notifies the policyholder. This notification includes details about the maturity date, the amount due, and instructions. Policyholders should keep their contact information updated with their insurer for communications.

To initiate the claim, the policyholder contacts the insurance company. This involves completing a maturity claim discharge form from the insurer. This form authorizes the release of the maturity amount and requires details, including policy number, name, and bank account information for transfer.

Supporting documentation is required to process the claim. Documents include the original policy, proof of identity, proof of address, and bank details. All documents should be submitted to the insurer’s designated office or online portal.

Once all required documentation is submitted and verified, the insurance company processes the claim. The maturity amount is transferred to the policyholder’s bank account or a check may be issued. Prompt and accurate submission ensures timely receipt of funds.