Understanding Universal Life Insurance – life insurance united state


When life insurance policies expire, taxes owed could leave you short.  life insurance, insurance, financial, investment The term “permanent life insurance” is a bit of a misnomer. Numerous permanent insurance policies have a maturity age of 100 (or sometimes 95) and pay out the cash value. There may be tax and financial ramifications for you and your heirs if you outlive your coverage.


After years of paying premiums for insurance you expect to keep in force until your death, the benefit of leaving wealth to heirs tax-free may be lost.Your insurance coverage may not pay out in full even though you’ve made a claim. An equally hefty tax bill is something you can count on as well.


An extended policy until age 120 is achievable in some cases, and while it’s not ideal, it’s often the best option.Those in their nineties are particularly vulnerable, but everyone with permanent insurance should check it over and take action if necessary.


There are typically three kinds of permanent life insurance: entire, universal, and variable universal life. Each of the three combines insurance coverage with a savings or investment component. A fully formed policy has two negative effects.


The death benefit will initially not be paid out to your heirs. Second, the payout is taxed as ordinary income (the cost basis, which is the total amount of premiums paid, is not taxed) and is typically a sizeable component of the total payout.


In the case of whole life insurance, the cash value at maturity is the same as the death benefit plus any interest that has accrued, but in the case of a universal or variable universal life policy, the owner may be in for another unpleasant surprise.


In order to provide more affordable premiums, universal policies separate the insurance and investment parts of a policy. However, if investments perform poorly, the death benefit paid out at maturity may be significantly lower than the cash value.


Solutions to the Issue

The first thing to do is determine when the policy you hold or are helping someone else with will mature. The standard age for coverage is 100, although in the last 15 years or so, that has likely increased to 120. The age of 95 or 96 is when some older plans expire.

The simplest solution is to request a maturity extension rider from the insurer, which will raise the policy’s maturity age to 120. Although some insurance companies may offer this add-on for a nominal price, others do not.

Without paying any additional premiums, the death benefit of a policy with an extension rider is typically equal to the cash value of the policy as of the original maturity date plus cumulative interest. It’s possible (but not guaranteed) that the rider will allow you to avoid a taxable event and that your beneficiaries will get the policy’s benefits upon your death, as you intended, if the insurer agrees to it.

In some cases, the Internal Revenue Service may determine that you still have tax obligations at the policy’s initial maturity date even if you choose not to take the lump sum payout (the tax principle of constructive receipt comes into play here). Even if insurers are arguing with the IRS, this is currently an unclear law.

It’s still worthwhile, though, because adding a maturity rider will guarantee the death benefit of the insurance.It may be more challenging for policyholders of universal life insurance to obtain the rider than those of whole life insurance, but even if you have whole life insurance, your insurer may refuse to honor the provision.

If your insurer refuses to renew your policy, look into purchasing a new one with the new standard maturity age of 120. Swapping may be doable for a generally healthy person in their 60s, but it may not be for those who are older or sicker.

It’s important to get advice from a qualified financial planner before making this choice, and a broker who doesn’t offer insurance products is not the best person to ask. As long as the owner and insured remain the same on both the old and new contracts, a Section 1035 exchange can be used to exchange one policy for another without incurring any taxable gain. To stay out of trouble with the IRS, you should seek the advice of a tax expert.

You should get the new policy before you cancel the old one so that you aren’t left without insurance.However, if you don’t want to or are unable to make an exchange before the insurance matures, you can convert it into an annuity instead. Instead of having all of the income land in a taxable lump in one year, it will land over a series of years, spreading out the tax due. It’s important to remember that you’ll have to pay taxes on your share of each annuity payout.

A definitive response on how the IRS and insurers will handle policies with overly short maturity dates should ultimately occur as more people live to enjoy their 100th birthday. In the interim, policyholders who want to reap the benefits of their “permanent” insurance plans should take the necessary initiatives.

Shomari Hearn is the senior vice president in charge of operations at Palisades Hudson Financial Group in Fort Lauderdale, Florida. He is also an enrolled agent with the Internal Revenue Service (IRS) and a Certified Financial Planner (CFP®). In Fort Lauderdale, Palisades Hudson Financial Group provides fee-only financial planning and investment management services and manages a total of $1.4 billion.


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