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Outliving Your Life Insurance

By Terry Savage on October 02, 2018

Will you live to be 100? Will your life insurance live to be 100?

Those are not idle questions. Many people who have paid for whole life and universal life policies for many years are finding that even if they are current on all their payments, the policies will “end” or “endow” at age 95 or 98 or 100. (More recent policies typically mature at age 121, reflecting new actuarial life expectancy tables.)

It’s simply the way policies were written years ago when life expectancies were far shorter than they are now. For policies written many years ago, it was thought the owner would rather have the cash if he or she lived that long. But even if there is a cash value at this point, the tax consequences could be devastating. The money that is distributed from the policy may be taxable — as opposed to life insurance death benefits, which pass tax-free to the beneficiary.

Centenarians make up less than 1 percent of the U.S. population, but their numbers are growing every year. According to the U.S. Census Special Report on Centenarians, in 2010 there were 53,364 centenarians in the United States or 1.73 per 10,000 people in the total population.

Could you live to be a centenarian? Check the possibilities at www.Livingto100.com. Fill out the simple form. You’ll be asked about hereditary factors (how long your parents, siblings lived) and lifestyle questions (exercise, diet) and even whether you regularly floss your teeth and wear your seat belt in the car! But with one click, you’re likely to get a surprising estimate of your potential longevity.

Time and Money

Life insurance policies depend on two key ingredients that fuel the promise of death benefits: time and money. And both are impacted by longevity.

In a recent column I detailed the issues of running out of time, when it comes to term insurance policies, which are set to automatically expire after you have paid level premiums for a fixed number of years, typically 10 to 20 years. At that point, if you need insurance you might not be able to qualify for another policy because of your health.

Running out of money inside the policy is another dangerous possibility. I’ve previously written about the likelihood that many older universal life policies could run out of money. Their annual premiums were based on the assumption that the “extra” money you deposited in premiums during the early years would earn a nice rate of interest, subsidizing the premiums in the later years. But, as we all know, interest rates have been very low for the last decade. As a result, people nearing retirement age are being told they must pay unexpectedly larger premiums than those illustrated to keep their policies “in force.”

And now people who are living longer are running into a third potential insurance policy crisis: outliving their policies. This crisis involves both time and money. Traditional cash value or whole life policies were sold with an “endowment” or “maturity” at a certain age, typically age 90 or later. That meant you had paid in enough premiums over the years for the premiums paid to equal the death benefit. At that specific age, the death benefit expired and you would be paid the cash value.

As more people reach their endowment or maturity age, they are confronted with two problems. First, there might not be much cash value in the policy if it was used to subsidize premiums. The death benefit was far more valuable than the cash that could be distributed. Even worse, the cash value when distributed might be subject to taxes on the portion that was earnings inside the policy. A tax hit comes just at the wrong time for people who were expecting to let their heirs get the death benefit tax free.

If you or your parents are growing older, this is the time to check with the insurance company to make sure your policy isn’t running out of time or money as we all live longer. And that’s The Savage Truth.

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