Life Insurance Renewal: Understanding Your Policy's Guaranteed Extension

Term life insurance policies typically guarantee the option to renew, but the renewal rate is often significantly higher than the initial rate. This is because the insurance company assumes that the policyholder's health may have deteriorated, and so the risk of a claim being made has increased. The guaranteed renewal rate is usually specified in the policy, and policyholders can usually renew up to a certain age, such as 70 or 75.

The guaranteed renewability clause

For example, if you buy a 10-year term life insurance policy, the policy will list your monthly or annual premium rate over the next 10 years. It will also specify the premium rate that you will have to pay should you renew the policy after every 10-year period. You get to renew your existing policy at guaranteed rates even if your health has deteriorated significantly since you first took out the policy.

However, there is a catch. You will have to pay a significant amount to renew the policy. Insurance companies will set the pre-specified life insurance renewal rates very high. They will assume that, without data to check your health, you will have health issues in the coming years. Consequently, your renewal premium rate will be similar to what someone in poor health would pay for a new policy.

As a result, the life insurance renewal premium rates for a 10-year term policy can be as high as five to 20 times the initial rate.

Technically speaking, you can usually keep on renewing your policy on a year-to-year basis until you are 95 years old. That’s because most term life policies have a guaranteed renewability feature. This lets you extend your coverage and current death benefit without going through a new underwriting process and getting another medical exam. However, the insurance company will change your premium if you extend. While this can make sense for some people, it may not be the best choice for most.

Extending a term policy

If your term life insurance policy is about to expire, you may be wondering what to do next. Here are some options to consider if you want to extend your coverage:

Renew your current term policy

Most term life insurance policies include a guaranteed renewability feature that allows you to extend your coverage and death benefit on a year-to-year basis, usually up to the age of 95. This means you can continue your current coverage without undergoing a new medical exam or underwriting process. However, the insurance company will likely increase your premium, and this increase will generally become more significant with each year of renewal. This option may be suitable for those who need coverage for a few extra years, especially if they have a terminal illness and are unlikely to qualify for a new policy.

Convert your term policy to a permanent policy

Many term life insurance policies contain a conversion option or rider, which allows you to convert your term policy into a permanent policy, such as whole life insurance, without providing evidence of insurability (i.e., without a new medical exam). The specifics of term-to-permanent conversion vary among insurance companies, with some allowing conversion at any point during the term of the policy, and others restricting it to the first few years of coverage or until a certain age. Converting to a permanent policy can be a good option if you've had a change in health, still have dependents, or have accumulated more debt than anticipated.

Purchase a new term policy

If you are in good health and don't need the same level of coverage, you may opt to purchase a new term life insurance policy. This could be a more cost-effective option, especially if you require less coverage than when you bought your initial policy. However, keep in mind that a new term policy will be based on your current age and health status, and you will likely have to undergo a new medical exam, which will impact your premium.

Purchase a permanent policy

If you don't have the option to convert your term policy, you can consider purchasing a permanent life insurance policy, such as whole life insurance. While permanent policies are more expensive than term policies, they offer lifetime coverage and include a cash value component that grows over time and can be borrowed against. This option may be beneficial for individuals with special needs dependents or a non-working partner who will require long-term financial support.

Final expense insurance

Final expense insurance, or burial insurance, is a type of permanent insurance with lower coverage limits designed to cover end-of-life expenses. It is often chosen by older adults who want to prevent their beneficiaries from bearing the financial burden of their death and by those with pre-existing health conditions who may have been denied standard life insurance.

When considering your options for extending a term policy, it's important to assess your current financial situation, future needs, and the specific provisions of your existing policy. Consulting with a financial advisor or licensed insurance professional can help you make an informed decision.

Converting to a permanent policy

Converting from a term life insurance policy to a permanent one is a straightforward process. First, check your current policy to see if conversion is an option. Then, check the term conversion period, or the time frame during which you can convert. Some companies will allow conversions at any point during the term, while others will limit the conversion period. For example, a 20-year term policy might only allow conversions during the first 10 years.

Next, contact your insurance agent or company to initiate the conversion process. You won't need to undergo a medical exam or go through the underwriting process again, and your underwriting class will remain the same even if your health has changed. You'll simply need to fill out a questionnaire, and your new permanent policy will be issued within a few days.

There are no fees for converting a term policy to a permanent one. However, your premium, or the rate you pay for coverage, will increase. The amount by which it increases will depend on several factors, including your age, the amount you convert, and the type of permanent policy you choose.

When deciding whether to convert to a permanent policy, consider your financial goals and budget. Converting to a permanent policy can be a good option if your health has changed, your budget has increased, you want a cash value asset, or you want to leave an inheritance for your children.

Renewal rates

When a term life insurance policy expires, policyholders can either let the policy lapse, apply for a new policy, or renew their existing policy. While the latter option is convenient, it comes with a significantly higher insurance premium compared to taking out a new policy. This is because the policyholder does not have to provide proof of good health when renewing an existing policy. The insurance company assumes that the policyholder's health may have deteriorated, posing a higher risk of a claim.

However, renewing an existing policy may be the best option for those who have developed serious health conditions since their last approval. In this case, the insurance company may charge a higher premium for a new policy or deny coverage altogether.

It is important to note that term life insurance policies automatically renew at the end of their term unless the policyholder specifically cancels the coverage. The renewal rates are typically stated in the policy document.

When to renew

Most term life insurance policies include a guaranteed renewability clause that lets you renew your coverage past its expiration date on a year-to-year basis. This means you can technically keep on renewing your policy annually until you are 95 years old. However, it's important to note that your premium is likely to increase each year you renew.

While this option can make sense for some people, it may not be the best choice for most. If you just need coverage for a few extra years, then this could be a viable option for you. For example, if you were diagnosed with a terminal illness and are unlikely to be eligible for a new policy, you could renew your term policy for a few years to ensure your beneficiaries would receive a death benefit.

On the other hand, if you need coverage for longer than a year or two, then you should consider other options to avoid paying a premium that rises every year. One option is to convert your term policy to a permanent, whole life insurance policy that will last the rest of your life. Many term life policies include a conversion provision, but be sure to check your policy or contact your insurance company to confirm.

When deciding whether to renew your term life insurance, it's important to assess your current life stage, financial situation, and insurance needs. If your circumstances have changed significantly since you first took out the policy, you may find that you don't need as much coverage anymore. Additionally, the high cost of renewal rates may make it more affordable to purchase a new term life insurance policy or explore other options.

Frequently asked questions