A life insurance policy is the primary means of covering the financial burden that occurs when the policy holder dies unexpected. However, many life insurance policies have also become investment opportunities as well. This is where life insurance maturity plays a role as the added interest rate can become a factor. If the life insurance should mature, the policy holder may face some interesting choices.
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What is Life Insurance Maturity?
Basically, this occurs when the reserve of the policy equals the death benefit. The reserve or cash value is then paid to the owner of the policy upon maturity. For life insurance policies that have a level premium, the investment portion of the policy has a charge that covers at least part of the death benefits. With the cash value replacing the all of the death benefit, the life insurance policy is said to have matured.
It can be a little confusing, but the cash value and reserve is the same thing. If the cash value equals the death benefit, it may be paid to the policy owner and have taxable consequences as a result if the cash that has been received exceeds the amount of premiums that has been paid over the life of the policy.
Since the money that has been paid to the premiums has already been taxed, it cannot be taxed again. However, if the life insurance policy has a building interest rate, then the interest that has been earned above and beyond the premiums that has been paid into the policy is subject to taxation if the policy has been cashed out.
However, there are new policies with an indefinite life insurance maturity date which actually makes it impossible for the policy to mature before the death of the insurer. In this manner, the policy is not cashed out, but instead the death benefit is provided to the beneficiary which may very well significantly higher than the premiums that were paid.
What is Life Insurance with Maturity Benefit?
Basically, this is a dual advantage from your life insurance policy. Your family will receive a death benefit in case you should pass away unexpected or suffer from a permanently disabling injury. However, if you do live past the maturity period which can be from 5 to 20 years, you can cash out the policy and purchase a new one if you desire.
One aspect of life insurance maturity is the “endowment” effect. While this type of endowment is different than the traditional interpretation which is a contract that will pay out a specific amount at a particular date, a life insurance policy may mature and pay out a cash value at that time. To “endow at maturity” when it comes to life insurance does not mean that the cash value must be paid out. In any case, the money that is collected as part of“cash out” will certainly be taxed to an extent.
Overall, for people in good health and under the age of 60, having life insurance with a maturity date offers options that can be useful when you get older.