Life Insurance: Managing Premiums and Policy Maturity
by Peter Katt
Explaining the implications of when and how a permanent life insurance policy matures can seem like a performance of Abbott and Costello’s “Who’s On First” routine.
But it is information you need to understand in order to make informed decisions regarding your permanent life insurance.
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One way for a policy to mature is the insured’s death. Proper management of a policy depends on understanding how a policy matures other than death. But there isn’t a one-size-fits-all answer: How a policy matures depends on the type of policy.
Whole Life Policies
Until recently, participating whole life was set up to mature at age 100. Contract premiums and dividends were programmed for the death benefits and cash values becoming equal at age 100. For insureds living to age 100, the policy matures for its cash values, which will equal the death benefits. Most companies continue the policy until the insured dies and then pay out the cash value as an income-tax-free death benefit, although there is no certainty as to this outcome. Some companies pay out the cash values at age 100, and those payments would be subject to income taxes. The genius of participating whole life is that the increase in paid-up addition death benefits along with the guaranteed elements will always result in cash values equaling death benefits at age 100. As you will see below, this isn’t the case with many other types of policies.
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Discussion
Most life insurance agents that read this article will be angry. However, what Mr. Katt describes is the rule and not the exception
posted about 1 year ago by Susan from Wisconsin
My clinic offers Physicians a variable universal life policy. I have questioned the salesman about some of the information contained in this and previous articles from Mr Katt. Despite his 3.5% commision he is unable to do the type of calculations Mr. Katt provides. Know what you buy and the long term issues. Cash value insurance can be a great financial planning tool or a minefield! It is not buy and forget.
posted about 1 year ago by Steve from Wisconsin
Re taxes. Your statement "Some companies pay out the cash values at age 100, and those payments would be subject to income taxes" conflicts with my understanding that life insurance payouts are not subject to income tax.
Please clarify/qualify your assertion.
posted about 1 year ago by Robert from Maryland
Robert,
Life insurance payouts (other than a death payout which is non-taxable) are subject to tax just like any other investment - to the extent that the amount paid out is greater than the basis (the amount you paid in) of the policy. In other words if over 30 years you paid in $30,000 and got a payout of $56,000, when you "cashed out" the policy, you would owe tax on the $26,000, which would be a before tax return of about 4% per year.
posted about 1 year ago by Dave from Washington
My 73 year old brother-in -law, a resident of the State of Washington which has an estate tax, has a last to die policy on his wife and himself with a death benefit of I think he said $6M. He is paying $7200 a month premium. THe policy is about 3 years old. This seems a little bit too good to be true since his cumulative premium payments during his and his 71 year old wife's lifetime will be only a small fraction of $6M.Neither one of them are in very good health.
Is this most likely a situation where if the policy is not funded at the last to die death the payout will not be $6M?
posted about 1 year ago by Jim from California
BUY ONLY WHOLE LIFE INSURANCE IF YOU ARE PLANING TO PASS SOME FORTUNE TO YOUR CHILDREN TAX FREE. I GOT BADLY BURNT TAKING VARIABLE UNIVERSAL POLICIES. PLEASE CONSULT YOUR FINANCIAL ADVISERS
BEFORE YOU TAKE ANY INSURANCE POLICIES AND FIND OUT HOW YOU CAN PASS THE PROCEEDINGS TAX FREE AFTER YOUR DEATH.
posted about 1 year ago by Bhaskar from Illinois
I have two $10,000 "FLEXIBLE PREMIUM ADJUSTABLE LIFE INSURANCE" policies with a maturity date of 2022. They each have a 10,000+ surrender value now. I do not need these policies. I decided to discontinue paying the premiums on these policies and the policy value keeps going up slightly each year from the interest earned. I noticed that the death benefit (13,095) went down slightly last year however the cash value keeps going up.
Have I made a wise move by stopping payment of premiums on these policy's?
posted about 1 year ago by Leonard from Oregon
