Outliving Your Life Insurance Policy

Congratulations! You made it to your 100th birthday. You’ve joined an exclusive, but growing, group of centenarians. The 2010 U.S. Census counted 53,364 centenarians, as compared to 32,194 in 1980. (I doubt anyone was counted in both tallies.)

You probably received many presents and lots of adoration from your family, but you may have also received one rude shock – the maturity of your life insurance policy and the end of your coverage.

If you have a permanent life insurance policy, you may be surprised to learn that “permanent” really isn’t permanent – there is a maturity date that effectively acts as an expiration date. By design, the majority of permanent insurance holders will expire before their policies will, so the presence of a maturity date usually isn’t relevant. However, if you live beyond the maturity date of the policy, benefits are paid to you at face value instead of as a death benefit to your beneficiaries.

What’s wrong with receiving money on your 100th birthday? There are two issues with the face-value payout – the face value amount can be considerably lower than the death benefit, and the face value payment to you is subject to taxes.

As a death benefit, payments are typically tax-free to beneficiaries. As a payout upon maturity, the effect is the same as when the policy is sold or surrendered – you are taxed on the gains you receive from the exchange as normal income instead of capital gains. For most life insurance policies and policyholders, taxing as income will mean that at least part of the payout will be subject to a significantly higher tax bracket.

With new and recently issued policies, the maturity date for permanent life insurance policies is 121 years of age based on the 2001 revision of the Commissioner’s Standard Ordinary (CSO) table, an actuarial table that assesses mortality expectations. Older policies were designed to expire at age 100, based on the CSO tables of the day – and it’s likely that most people turning 100 in the near future acquired their policy before the latest CSO revision.

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Frankly, you may not have much use for your life insurance policy at age 100. Life insurance is not for the deceased – it is for those who are left behind.

If a death would create a financial loss for someone, such as a primary breadwinner passing away and leaving a spouse and children behind with bills to pay and a decreased family income, life insurance is important. However, for retirees with no dependents and an income source that extends to both spouses, life insurance may not matter.

Whether you look at life insurance as a necessary safety net or a form of investment, it’s wise to re-evaluate your insurance needs well before you reach age 100. At some point, your premiums may overtake the benefits.

If you are below 100 years of age, take a few moments to look at the terms of your permanent life insurance policy, and consider whether you want to change your coverage or accept the premise that your policy could outlive you. Are you at a point in life where the current policy benefits are not worth the costs, and what are the costs involved in making a policy change?

It’s ironic that many policies expire on the insured’s 100th birthday, as 100 candles on a cake could cause a payout due to the large fire risk and the physical strain of blowing them all out!

This article by Melissa Pedersen first appeared on moneytips.com and was distributed by the Personal Finance Syndication Network.

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