What Does It Mean for an Insurance Policy to Mature?

by Dale Marshall

Owners of whole life, universal and other types of permanent life insurance policies may note that the policy mentions a “maturity date,” which often coincides with their own 100th or 121st birthday. In general, when the insured lives to the maturity date, the policy pays either the death benefit or the cash value directly to the insured. The concept of maturity of an insurance policy derives from a different type of life insurance policy called an endowment policy. This can have significant tax implication for the insured, though.

Endowment Policy

Endowment policies are sometimes used to fund a college education.

An endowment life insurance policy is a form of insurance that “matures” after a certain length of time, typically 10, 15 or 20 years past the policy’s purchase date, or when the insured reaches a specific age. If the insured dies before the policy matures, the policy’s beneficiaries are paid a stated death benefit. If the insured lives to the maturity date, the policy’s cash value is paid to, or endows, the insured. This amount is sometimes but not always the same as the death benefit amount. The policy ceases to exist upon the earlier of the insured’s death or the contract’s maturity. More costly than whole life or universal life policies because of their shorter time frame, endowment policies are sometimes used as a way of paying for young people’s college tuition.

Whole Life Insurance

Whole life insurance is simply an endowment policy whose maturity date has been extended to 100 or to 121, ages that only a relatively few people will achieve. In general, premiums are smaller and guaranteed not to change, and are paid for as long as the policy is in effect. Cash values are adjusted so that they equal the death benefit upon maturity. In the event a person lives to the policy’s maturity date, the policy pays the cash value amount in a lump sum as an endowment to the insured.

Universal Life Insurance

Sometimes called a hybrid of whole life and term life policies, universal life insurance is a less costly form of insurance that also builds cash value and covers the insured for life. However, the cash value and the death benefit are not linked, as they are in a whole life policy, Thus, if the insured lives to the maturity date, anywhere from 95 to 121, the policy will pay the cash value to the insured as an endowment, but this may be significantly lower than the death benefit.

Tax Implications

Maturing insurance policies and endowments bring significant tax consequences.

U.S. tax policy considers endowment income -- that is, the amount of an endowment less the premiums paid by the insured -- to be ordinary income, and it’s taxed at that rate. By contrast, life insurance benefits are not taxable. The purchasers of whole life and universal life insurance policies expect to die before their policies mature, and their beneficiaries to be paid a tax-free benefit. If they live to their policies’ maturity dates, the death benefit is eliminated, and they’re paid endowments that are significantly reduced by taxation. Thus, most insurance companies in the U.S. are working with policyholders to extend their policies past the maturity date, if they live to it, and not pay the lump-sum endowment.

About the Author

Dale Marshall began writing for Internet clients in 2009. He specializes in topics related to the areas in which he worked for more than three decades, including finance, insurance, labor relations and human resources. Marshall earned a Bachelor of Arts in communication from the University of Connecticut.

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