In 1900, the average life expectancy of a newborn was only 32 years old. By 2025, that number more than doubled to 73 years, and the trend is expected to continue.1,2
Living this long may have unexpected tax consequences. Here’s why.
Many older life insurance policies mature at a specific age. If the insured individual attains that age, the policy’s cash value may be paid out to the policy owner in lieu of a death benefit payment.3
Tracking Taxes
This payout may be taxed as ordinary income on the amount that exceeds the policy owner’s cost basis (or the sum of after-tax premiums). The after-tax amount would then become part of the policy owner’s estate and may be subject to further taxation upon the policy owner’s death.4,5
If a policy is owned by an irrevocable trust, the trust is responsible for any tax owed, though the proceeds would not become part of the insured’s estate if the insured had no incidents of ownership.5,6
Managing the Taxable Risk
This taxable risk may be mitigated through a maturity extension rider, which allows the policy to continue until the death of the insured. Many newer life policies come with a higher maturity age (like 120) or an indefinite period.7