Term Life Insurance: Renewing Your Policy And Options

Term life insurance is a type of insurance that provides coverage for a specific period, typically between 10 and 30 years. Once the term ends, you may be able to renew or extend your policy, but this depends on the terms outlined in your initial contract. While renewing your term life insurance policy is possible, it's important to understand how it works and whether it's the best option for you. In this article, we'll explore the process of renewing term life insurance, the associated costs, and alternative options to consider.

Extending a term life insurance policy

Understanding Term Life Insurance:

Term life insurance is a type of life insurance that provides coverage for a specific period, typically between 10 and 30 years. It is designed to give your beneficiaries a payout if you pass away during the term. Unlike permanent life insurance, term life insurance does not have a cash value component, and the coverage ends if you outlive the policy term.

Extending Your Current Term Policy:

Most term life insurance policies include a guaranteed renewability feature that allows you to extend your coverage and maintain the current death benefit without undergoing a new medical exam. However, this option usually comes with higher premiums, which can increase significantly with each renewal. While this may be a viable solution for those with changing health conditions, it may not be the most cost-effective option for everyone. Carefully review the terms of your policy and consider seeking professional advice to understand the financial implications of extending your current term policy.

Converting to a Permanent Policy:

Another option to extend your coverage is to convert your term policy into a permanent life insurance policy. Many term life insurance plans nowadays offer a conversion option or rider, which allows you to switch to a permanent policy without providing evidence of insurability, such as undergoing another medical exam. Permanent policies provide lifelong coverage and often include a cash value component that can grow over time. However, the premiums for permanent policies tend to be higher, and the specific conversion options and deadlines vary across insurance companies. Be sure to review your policy carefully and initiate the conversion process well in advance if you decide to go down this route.

Purchasing a New Term or Permanent Policy:

If extending your current term policy or converting to a permanent one are not suitable options, you can also consider buying a new term or permanent life insurance policy. While purchasing a new term policy will require you to go through the application process again, it may be more cost-effective than extending your current policy, especially if your health remains relatively stable. On the other hand, buying a new permanent policy will provide lifelong coverage but at even higher premiums than a converted policy. Weigh your options carefully and consider consulting a financial professional to make an informed decision that best meets your needs and circumstances.

Renewing a term life insurance policy

Term life insurance policies typically offer coverage for a limited time, usually between 10 and 30 years. Once the term ends, you will no longer have the same level of protection, and you may find yourself financially vulnerable. However, many policies offer the option to renew or extend your coverage before the expiry date. This article will guide you through the process of renewing a term life insurance policy and the factors you need to consider.

Understanding the renewal process

The terms of renewing or extending your policy should be outlined in your initial contract, making it easier for you to plan for the future. However, it's important to note that the ability to renew is not always guaranteed unless explicitly stated. Several variables can affect the renewal process, including changes in your health, the company's underwriting process, and the addition of "riders" or add-ons to your policy. These changes will likely result in adjustments to your monthly premium payments.

Timing of renewal or extension

The main difference between renewing and extending a life insurance policy is the timing. Extension can occur at any time during the active contract, while renewal takes place once the agreement has ended. Both options may allow you to modify the conditions or add-ons to your policy.

Medical exam requirements

Whether you need to undergo a medical exam during the renewal process depends on your policy's renewability provision. Most well-founded renewability provisions allow you to renew without a medical exam, especially if you are under a certain age (often as high as 95). However, it's important to consult your agent, as there can be variations in how these policies work.

Impact on monthly premiums

Extending or renewing your term life insurance policy may result in changes to your monthly premiums. If the terms of the contract do not require a medical exam for renewal, your monthly premiums will likely remain unchanged. However, even if your premiums stay the same, a 20-year term life insurance policy extended by 10 years will usually be more affordable than a 10-year term policy.

Renewal window and application process

Term life insurance policies typically provide a small window of time after the expiry date to decide on renewal. If you miss this window and decide to renew later, you may need to start the application process from scratch, including undergoing a medical exam. Therefore, it is crucial to be aware of the renewal window specified in your policy's renewability provision.

Alternatives to renewal

If you are approaching the end of your term life insurance contract, you have several alternatives to consider besides renewal. You can choose to purchase a new term life insurance policy, which may be more cost-effective, or convert your term policy into a permanent life insurance policy, such as whole life or universal life insurance. This conversion option is ideal for those who want lifelong coverage but be prepared for substantially higher prices. Additionally, there is the option to sell your term life insurance policy, known as a viatical settlement, but this is a highly situational decision.

In conclusion, while renewing a term life insurance policy is possible, it is important to carefully consider the associated conditions and how they align with your current life situation. Understanding the renewal process, timing, medical exam requirements, premium adjustments, and alternative options will help you make an informed decision about renewing your term life insurance policy.

Converting a term life insurance policy to permanent life insurance

How to Convert Term Life to Permanent Life

First, check the language of your policy to see if conversion is an option (it is on most policies). Next, check the term conversion period—the time frame during which you can convert. Some companies will allow policyholders to convert at any point during the term of their policy. But many will limit the conversion period. For example, the conversion period on a 20-year term policy might be limited to the first 10 years the policy is in force. Then contact your insurance agent or company to ask to convert your policy. You won't have to take a life insurance medical exam or go through the underwriting process. You'll simply fill out a questionnaire, and your new permanent policy will be issued within a few days.

The Cost of Converting

There are no fees to convert a term policy to a permanent policy. However, the rate you pay for coverage—your premium—will increase. How much it increases depends on several factors. Although your health won’t be a factor because you lock in your original underwriting class, your age when you convert will affect your rate. The older you are, the higher your premium will be. The amount you convert will also impact your premium. You have the option to convert the full value of a term policy or just a portion of it. For example, if you have a policy with a $500,000 death benefit, you could convert just $250,000 of it to a permanent policy. You’ll pay less for a permanent policy with a smaller benefit—and the premium on the remaining term life policy will drop because the benefit has been reduced.

Reasons to Convert a Term Life Policy

You might have wanted to buy a permanent policy from the get-go but couldn’t afford the higher premium. If you’re making more money now, it can make sense to convert if the higher premium on a permanent policy fits within your budget. You might have had a change in health. Converting a term life insurance policy to a permanent policy allows you to extend your coverage without going through the underwriting process. This can be a valuable option if your health changes for the worse. If you wanted to get a new term life policy to extend your coverage, you would have to pay astronomical rates or could even be uninsurable. But if you convert, your current health won’t affect the premium on a permanent policy or your insurability.

Pros and Cons of Converting Term to Whole Life Insurance

Pros:

• Longer-lasting coverage to help you transfer wealth. Your loved ones will receive a death benefit (a financial payout) when you die, no matter when that occurs.
• Consistent premiums. Premium payments are consistent for the duration of your insurance coverage, just like with many term life policies.
• Cash value. Whole life insurance has a cash value that grows over time.
• Estate planning. Possibilities to support your estate plan may be more accessible with whole life insurance than with term coverage.

Cons:

• Typically higher cost than term life insurance. Whole life insurance premiums may cost more than five times what a term policy costs.
• Premium payments might not have an end date. Some life insurance policies expect payments for as long as coverage lasts. This could make it difficult to keep paying if your income frequently changes or you lose your job.
• Cash value isn’t as easy to access as your checking account. You might pay fees or taxes when you access the cash value of a whole life policy. Removing money will also lower the value of your death benefit.
• Lower cash value growth rate. Whole life insurance may have a lower growth rate than other investment strategies you might pursue.

Buying a new term life insurance policy

When considering buying a new term life insurance policy, it is important to understand the different options available, the factors that affect the premium, and the benefits that term life insurance provides.

Types of term life insurance policies

Term life insurance policies typically come in two types: level-premium policies and yearly renewable term (YRT) policies. Level-premium policies have a fixed monthly payment for the duration of the policy, usually ranging from 10 to 30 years. YRT policies, on the other hand, are one-year policies that can be renewed annually without providing evidence of insurability, but the premiums increase each year as the insured person ages.

Additionally, there are decreasing term policies, where the death benefit decreases each year according to a set schedule, and convertible term life insurance policies, which can be converted into permanent life insurance policies without the need for a medical exam.

Factors affecting the premium

The premium for a term life insurance policy is based on several factors, including the policy's value, the insured person's age, gender, health, driving record, smoking status, occupation, hobbies, and family history. The insurance company's business expenses, investment earnings, and mortality rates for each age also play a role in determining the premium.

Benefits of term life insurance

Term life insurance is particularly attractive to young people with children as it provides substantial coverage at a low cost. It is also suitable for people with growing families, as it can be maintained until children become financially independent. Term life insurance can also be beneficial for an older surviving spouse, although premiums are higher for older applicants.

Process of buying term life insurance

When buying term life insurance, it is important to assess your financial situation and the coverage you need. Calculate your sum assured by considering your debts, family members who depend on you, and any other financial liabilities. You can use an online term insurance premium calculator to estimate the premium for your desired sum assured.

Once you have determined the coverage amount, select a reputable insurance company and fill out the application form, providing details about your age, medical history, and lifestyle habits. The insurance company may also require a medical exam. After submitting the application and paying the premium, you can rest assured that your loved ones will be financially protected in the event of your untimely death.

Key considerations

When choosing a term life insurance policy, it is essential to compare the options available, check the claims settlement ratio, understand the specific benefits offered, and carefully select any additional riders for enhanced coverage. Additionally, consider the online availability of the insurance provider and their responsiveness in resolving queries.

Buying a new permanent life insurance policy

If you're considering buying a new permanent life insurance policy, it's important to understand how it differs from term life insurance. Permanent life insurance is designed to provide long-term, often lifelong, coverage. As long as you continue to pay your premiums, your coverage will remain in force. Unlike term life insurance, which only covers you for a specific period, permanent life insurance offers the security of knowing that your loved ones will be protected regardless of when you pass away.

One of the key advantages of permanent life insurance is the opportunity to build cash value. This feature allows you to accumulate wealth over time, which can be particularly beneficial for funding unexpected emergencies, college tuition, or supplementing your retirement income. The cash value component also gives you the flexibility to borrow against your policy or even surrender it for cash if needed. However, it's important to note that accessing the cash value will reduce the available cash surrender value and death benefit.

When considering a permanent life insurance policy, you'll come across various types, including whole life insurance, universal life insurance, and variable life insurance. Whole life insurance offers fixed premiums and a slow accumulation of cash value. Universal life insurance provides the flexibility to adjust your premiums and death benefit as your financial circumstances change. Variable life insurance allows you to invest your cash value in investment options of your choosing, but it comes with higher risks.

The cost of permanent life insurance is significantly higher than term life insurance due to the lifelong coverage and investment opportunities it offers. When deciding between term and permanent life insurance, it's essential to evaluate your long-term needs, budget, and the level of financial protection you want for your loved ones.

If you're thinking of purchasing a new permanent life insurance policy, it's recommended to consult a financial professional or insurance agent. They can help you navigate the different types of policies, explain the pros and cons of each, and ensure that you make an informed decision based on your unique circumstances and goals.

Frequently asked questions