Happy 100th Birthday – Outliving Your Life Insurance

You don’t expect to be in your 90s and worried about your life insurance policy. When you chose to take out a permanent policy, you expected it to be … permanent.

Term Life Insurance and Whole Life Insurance 

Term life insurance provides coverage for a certain time period (usually 10, 20 or 30 years) and is designed to protect your dependents financially in case you die while they’re still reliant on your income – to pay the mortgage, childcare or other essential bills. And permanent (or ‘whole’) insurance is designed to outlast all that.

When you take out a term policy, you choose a payout amount (otherwise known as a death benefit) and pay a monthly premium. In most cases, both the premium and the benefit remain unchanged during the “term” of the policy. It’s usually fairly inexpensive because most people don’t ever use it. They live longer than their policy’s coverage period and, with a paid-off home and children living on their own, may no longer need the security.

Permanent life insurance, on the other hand, is more expensive because it is designed to last as long as the policyholder lives and may contain other benefits such as critical illness, long-term care or tax-deferred savings.

Unless that is, you live longer than your insurance company expected you to. Even permanent policies have limits, in the form of life insurance maturity dates. Ideally, maturation will occur long after you die, but people are living much longer on average than they used to and their insurance companies are canceling their policies once a person turns 100.  

Hitting the Century Mark

Until recently, however, living until 100 was a rarity. Now that people are living longer and longer, permanent life insurance policies have largely caught up – many taken out in the past 10-20 years don’t mature until their policyholders turn 121. 

According to the article, Happy 100th Birthday! There Goes Your Life Insurance, “the limits weren’t an issue in the many decades when very few people lived beyond 100. But they increasingly are a problem for the U.S. life-insurance industry as more people become centenarians. There were an estimated 53,364 centenarians in the U.S. as of 2010, up from 37,306 in 1990 and 32,194 in 1980, according to a U.S. Census report published in December 2012.”

Living until age 100 used to be rare, so many older life insurance policies were written with the 100th birthday as the maturity date. While the cash value of the policy remains even if your maturity date occurs within your lifetime, the traditional payout component will be canceled. You will receive the premiums you paid in over the years but the invested portion isn’t a guarantee. And you will no longer have a life insurance policy.

Because many people who opt for whole life insurance do so with a specific purpose in mind – to provide continuing care for a child with special needs, to offset taxes on a sizeable estate, or to equalize inheritance in the case of business ownership – the cancellation of a significant portion can be financially devastating.

“Ironically, policy maturity dates were born as a way to help consumers get a reasonable value out of a policy after years of ownership but before a death,” said Paul Graham, a senior actuary with the American Council of Life Insurers to the Wall Street Journal. ‘To calculate monetary values and set annual premium levels,’ he said, ‘you have to have an endpoint.’”

“The agents didn’t want the policies maturing before people were dying, the companies didn’t want it happening, and policyholders didn’t want it happening,” Graham said.

Reviewing Your Coverage

So how do policyholders and issuers work together to make sure it doesn’t keep happening and catching elderly people and their families off guard?

“It’s important to review your insurance coverage every year – and that includes life insurance,” said Brian M. Dial, licensed life insurance agent and certified financial planner at SelectQuote. “Many people assume life insurance is a one-time purchase: you buy it, you’re set for life. But that’s not the case. Circumstances change and policies become less relevant.”

If an approaching life insurance maturity date is threatening your finances or those of someone you love, what can you do about it? “If the policyholder is less than 85 years old, they may want to do a 1035 exchange into a new life policy that goes out to age 121. If they’re in their 90s, they could talk to their planner about doing a 1035 exchange into a deferred annuity with the cash value,” said Dial.

If reading that advice made you feel even more panicky than the prospect of your life insurance disappearing, a professional can help you make heads and tails of the situation. “Panicking doesn’t help the situation,” said Dial. “Schedule a meeting with an attorney and a financial planner to go over your status and your options. Why did you buy permanent life insurance in the first place? Are your circumstances and goals still the same? Depending on what you decide, your team can help you figure out the best way to make sure your finances continue supporting your loved ones after you’re unable to.”

September is Life Insurance Awareness Month (#LIAM17). Our licensed agents are available to provide you with a free quote or any information you need as you evaluate the best life insurance options for you and your family.

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