When it comes to life insurance, a universal policy is usually an excellent option. It provides coverage for the life of your client, and it can accrue cash value along with the death benefit. However, for policies obtained before 2009, there can be one potential problem—maturity. In this article, we want to go over what happens when a universal life insurance policy matures and how your clients can be prepared for it.
What Is Universal Life Insurance?
Typically, the two umbrellas for life insurance are term and permanent. Universal life insurance is a permanent life insurance policy, and is similar to whole life, in that it will last forever as long as your clients maintain sufficient cash value to cover the monthly costs. The primary benefit of universal life insurance is that policyholders can pay more upfront to build a bigger cash value, which they can then borrow against during their life or potentially use to increase the death benefit. Two types of universal life policies - Variable Universal Life and Indexed Universal Life helps policyholders potentially earn more money over the life of the plan. Variable Universal Life allows the policyholder to allocate funds into sub-accounts which are similar to mutual funds. Indexed Universal Life provides the upside of the market - subject to a cap with downside protection.
So, if your clients want a way to build a significant nest egg over time, a universal life insurance policy may be an ideal solution. Not only can they increase their holdings over the long term, but they can use the cash value to pay premiums later in life so that they maintain coverage without pulling money out of pocket.
Universal Life Insurance Policy Maturity
If your clients are looking to purchase new universal coverage, they don't have to worry about outliving it. However, policies obtained before 2009 may expire relatively early. In some cases, it could mature at age 90 or 100. Considering that individuals are living longer and longer, there's a good chance that your client could outlive their insurance. Policy maturity happens one of two ways:
- First, the policyholder dies. The plan matures, and the death benefit (possibly including any remaining cash value) goes to his or her beneficiaries.
- Second, the policyholder outlives the coverage and doesn't file for an extension. If this occurs, the death benefit expires, and the cash value goes to the policyholder.
Unfortunately, if your client outlives his or her life insurance, then any remaining balance will become taxable. If he or she has a sizable nest egg saved in a policy, this could create a substantial tax burden, and potentially put your client into a higher tax bracket for that year. To avoid this issue, we highly recommend filing for a maturity extension well before the plan will expire.
Universal Life Insurance Maturity Extension
Not all insurance companies allow for extensions, but those that do will have multiple provisions to consider. These can include:
- The death benefit and the cash value are added together after the policy maturity date
- Upon maturity, beneficiaries will either receive the full death benefit or the cash value amount, whichever is higher
- If your client has supplemental coverage to increase the death benefit, this coverage may be voided after the original maturity date
- In rare cases, a maturity extension may only apply to the cash value. This means the initial death benefit becomes null and void.
Overall, you want to talk to your clients about these extension options if they believe that they will outlive their policy. However, since modern plans cover individuals until the age of 121, it shouldn't be a problem in those cases.
Contact Advisor's Resource Today
Universal life insurance is a viable option for many of your clients. Contact us to find out more about these policies, as well as how to provide maturity extensions to your clients if necessary.