Life Insurance: End-Of-Term Payouts Explained

Life insurance is a policy that covers an individual for a specific period, usually 10, 20, or 30 years. When the insured dies, the beneficiaries must file a death claim with the insurance company, and the benefits are paid out. The type of policy influences the payout process and amount. Term life insurance, for instance, provides coverage for a set period and pays out a death benefit if the insured dies within the term. Whole life insurance, on the other hand, is a permanent form of insurance that remains in effect for the insured's entire life, provided they continue to pay premiums. It also includes a savings component, allowing policyholders to borrow or withdraw funds. Understanding the different types of life insurance and their respective payout processes is essential for financial planning and ensuring that loved ones are taken care of in the event of the insured's death.

Term life insurance converts to whole life

Term life insurance policies typically offer the option to convert them into permanent life insurance policies. This is often referred to as a "conversion privilege or rider". While the specifics of this conversion vary from policy to policy, there are several common scenarios in which switching from term to whole life insurance may be beneficial.

You're still providing for dependents

Parents often obtain a life insurance policy that lasts until their children have reached legal age or graduated from college. However, you might find yourself unexpectedly caring for a family member in need, whether they're young or elderly. Converting from term to whole life insurance can help provide for the unexpected needs of loved ones.

You have outstanding debt

You may still have outstanding debt as you near your term life policy’s expiration date that life insurance could help pay off when you pass away. By converting from term life to whole life, you can maintain your coverage for the entirety of your life and protect your family financially.

Your health situation has changed

If your health has deteriorated since you took out your term life insurance policy, you may find it difficult to take out a new whole life insurance policy. In this case, converting your term life insurance policy may be a good option, as your insurance company might forgo the underwriting process and the medical exam and lifestyle assessment that typically accompany a new policy.

Your budget has changed

If you originally bought term life insurance because it was more affordable, you may now be able to afford the higher premiums of a whole life policy. In this case, converting your term life insurance policy may be a worthwhile and convenient option.

You now want a cash value asset

Converting from term to permanent life insurance gives you access to a cash value component, which grows with interest over time. You can use your policy's cash value to borrow money, in the form of a life insurance loan, or even pay your premiums.

Return of premium policies

Some insurers offer this type of policy, which provides a safety net for those who worry about wasting money on a policy they never use. However, these policies typically have higher premiums than traditional term life policies, so it is important to compare the costs before deciding. The higher premium is essentially an added protection cost, and some companies offer this as a standalone policy, while others provide it as a rider.

State Farm's Return of Premium Term Life insurance, for example, offers a level premium payment term of 20 or 30 years. If the policyholder outlives that period, they will receive all the policy premiums they've paid back. AAA Life Insurance Company also offers a similar product, where policyholders can receive up to 100% of their premiums back after choosing between 15, 20, or 30 years of coverage.

Extending term life insurance

Renewable and Convertible Term Insurance

Term insurance plans typically have fixed periods, but some policies include provisions for renewal or extension. Renewable term insurance allows for auto-renewal without medical underwriting, ensuring continued coverage even if the policyholder's health has changed. However, premiums will increase with each renewal. Convertible term insurance, on the other hand, allows the policyholder to convert their term plan into a permanent plan after a specified number of years, without the need for a medical examination.

Return of Premium Policies

Some insurers offer "return of premium" policies, where the policyholder receives all premiums back if they outlive the term. These policies usually have higher premiums than traditional term life policies, so it's essential to compare costs before deciding.

Extending Coverage vs. Purchasing a New Policy

While it is possible to extend term life insurance in certain cases, it is generally not recommended. Extending coverage may result in paying for more insurance than necessary. Instead, purchasing a new policy with a new term length that fits the policyholder's current needs is often a better option.

Understanding Conversion Options

When considering term life insurance, it's important to understand the conversion options and deadlines at the time of purchase. Term conversion allows policyholders to convert their term policy into a permanent one without a medical exam, which can be beneficial for those who develop health conditions. However, conversion rates are typically based on the original risk class, and premiums will increase due to age.

Evaluating the Need for Continued Coverage

Before deciding to extend or renew term life insurance, it's essential to assess whether continued coverage is necessary. Factors such as dependents relying on income, outstanding debts, business obligations, and special needs dependents should be considered when making this decision.

Using term life insurance while alive

Term life insurance is a policy that covers you for a specific period, usually 10, 20, or 30 years. While it's designed to provide financial protection for your loved ones in the event of your death, there are ways to utilise your term life insurance policy while you're still alive. Here are some strategies to consider:

Life Settlements or Viatical Settlements:

If you have a convertible term life insurance policy with a substantial death benefit, you may be able to sell it for cash. This option is particularly relevant if you have a policy with a death benefit of $100,000 or more. A life settlement or viatical settlement can provide you with immediate funds, but it's important to carefully consider the implications before proceeding.

Borrowing Against Your Policy:

If your term life insurance policy has a cash value component, you may be able to borrow against this value. This approach can be useful if you need funds for debt repayment, mortgage payments, or other major expenses. However, it's important to understand that any amount you borrow, plus interest, will be deducted from the death benefit paid to your beneficiaries.

Surrendering Your Policy:

If you have a term life insurance policy with a cash value, you may have the option to surrender it and withdraw the existing cash value. This can provide you with immediate access to a lump sum of money. However, by surrendering your policy, you terminate your coverage, and your beneficiaries will no longer receive a death benefit. Therefore, it's crucial to carefully evaluate your needs and consider alternative options before surrendering your policy.

Convertible Term Life Insurance:

If you anticipate the need for permanent life insurance coverage, you can consider converting your term life insurance policy into a permanent one. This option is valuable if you develop health issues that would make it challenging or impossible to qualify for a new policy. Convertible term life insurance allows you to make this change without going through the medical qualification process again. However, keep in mind that overall premiums will increase significantly since whole life insurance is more expensive than term life insurance.

Policy Renewal:

Most term life insurance policies offer the option to renew for a limited number of years without requiring evidence of insurability. This means you can extend your coverage even if your health has changed. However, the premiums will increase with each renewal as they are based on your current age. While this option may be beneficial in certain circumstances, purchasing a new policy with a different term length that aligns with your current needs is often a better choice.

While these strategies can provide you with access to funds while you're alive, it's important to carefully consider the implications of each option. Consult with a financial advisor or licensed insurance professional to make informed decisions based on your specific circumstances and goals.

Life insurance payout options

Life insurance payouts can be a financial safety net for families, providing crucial funding after a loved one's death. Here are the steps to take and the options available for receiving a life insurance payout.

Step 1: Understanding Your Beneficiary Status

First, it's essential to know your beneficiary status. The policy owner can choose a primary beneficiary, who will receive the payout when the policy owner dies, and a contingent beneficiary, who will receive the payout if something happens to the primary beneficiary. If there are multiple primary or contingent beneficiaries, the policy owner can specify what percentage of the death benefit proceeds each will receive.

Step 2: Knowing the Death Benefit Amount

It's important to be aware of the amount of the death benefit you will receive as a beneficiary. This can help you decide on the best use of the money. It's also a good idea to discuss any final wishes regarding funeral planning and specific ways the policy's death benefit should be used.

Step 3: Understanding the Different Payout Options

Insurers typically offer several payout options for life insurance death benefits:

• Lump-Sum Payment: The entire benefit amount is paid at once by check or electronic transfer. This is the default payment for most policies and is typically tax-free.
• Fixed Period Payment: The beneficiary can specify a period over which they want to receive payments. Payments are made until the death benefit is depleted.
• Lifetime Income: This option allows the beneficiary to receive guaranteed income for life in fixed monthly payments.
• Life Income with a Period Certain: The beneficiary receives guaranteed payments for life or over a certain period (5, 10, or 20 years), whichever is longer.
• Interest Income: The beneficiary can leave the death benefit in an interest-bearing account and receive periodic interest payments. The original benefit can be paid to a secondary beneficiary when the beneficiary dies.

Step 4: Filing a Life Insurance Claim

To receive a life insurance payout, beneficiaries must take the following steps:

• Obtain multiple copies of the insured's death certificate.
• Notify the insurance company of the insured's death and fill out the required claim forms. If there are multiple beneficiaries, each may need to fill out a separate claim.
• The insurance company will review and approve or deny the claim. Claims may be denied for reasons such as suicide within a certain period after the policy was purchased, a pre-existing condition that wasn't disclosed, or a cause not covered by the policy.
• If the claim is approved, decide on the desired payout option and plan how to use the money wisely. Consider seeking guidance from a financial professional.

It's important to note that the life insurance claims process can take around two to four weeks, or even longer in certain situations.

Frequently asked questions