Uncle Sam has a birthday gift for certain people who make it to 100: A tax bill. This applies to those who purchased so-called permanent life insurance to address complex financial planning needs, including estate planning. These contracts come with a savings component, known as cash value, which accumulates free of taxes.
Your heirs generally get a death benefit payout free of income taxes if you pass away. But if you beat the insurance company by surviving to see 100, your insurer could cash you out of your policy, potentially leading to taxes.
Insurance companies price their policies based on mortality tables, which measure the likelihood of a person of a certain age dying in a given year. Though permanent life insurance is intended to remain in force for as long as you’re alive and paying premiums—unlike term policies which typically last 20 or 30 years—these contracts have a maturity date that historically has kicked in on a policyholder’s 100th birthday.
On that date, your insurance company will pay you the cash value and end your contract. This amount could be less than the death benefits your heirs would have received. You will be taxed on the cash value to the extent these proceeds exceed the amount of premiums you've paid.
Many permanent life insurance policies issued prior to 2004 have a maturity date of 100, according to Michael Lovendusky, vice president and associate general counsel of the American Council of Life Insurers. but over time the number of centenarians has swelled. Globally, there were close to half a million individuals over age 100 in 2015, according to the Pew Research Center. That number is expected to grow to nearly 3.7 million by 2050.
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