Renewing 20-Year Term Life Insurance: When And Why To Do It

Life insurance is a crucial financial product that ensures your loved ones are financially secure in the event of your death. Term life insurance is a type of life insurance that provides coverage for a specific period, typically 10, 20, or 30 years. While it is a popular and affordable option, one key consideration is how often it should be renewed.

The frequency of renewal depends on various factors, including your financial responsibilities, family situation, and health. It's essential to assess your needs and understand the different options available when your term life insurance policy is nearing its end. You can choose to renew your existing policy, convert it to a permanent policy, or purchase a new policy altogether. Each option has its pros and cons, and it's important to make an informed decision based on your specific circumstances.

Extending your 20-year term life insurance policy

Twenty years may seem like a long time, but it can pass by in a flash. If you're approaching the end of your 20-year term life insurance policy, you might be wondering what to do next. Here are some options to consider:

Extending your current policy

Technically, you can renew a term life insurance policy on a year-to-year basis until you're 95 years old. Most term life policies have a guaranteed renewability feature, which means you can extend your coverage without going through a new underwriting process or medical exam. However, the insurance company will typically increase your premium, and this amount will generally increase more each year. This option is rarely used and is usually done by those who are otherwise uninsurable, such as those diagnosed with a terminal illness.

Converting to a permanent policy

Many term life policies now contain a conversion option or rider, allowing you to switch to a permanent policy without providing evidence of insurability (i.e., without a new medical exam). Different insurance companies have different ways of handling these conversions, so check your policy for available options. For example, some companies may only allow conversion to a universal life policy and not a whole life policy. There will also be a deadline for conversion, with some insurers allowing conversion at any point during the term, while others may limit it to the first few years of coverage or until a certain age.

Getting a different life insurance policy

Your life circumstances may have changed since you first took out your 20-year term life insurance policy. You may have more savings now and not need as much coverage, or you may have a bigger family and need more. Shopping around for a new term-life policy can be a good opportunity to adjust your coverage to suit your current needs. However, keep in mind that you will need to provide evidence of insurability by undergoing a new medical exam, and your premium will likely be higher due to your increased age and reduced life expectancy.

Converting to a permanent life insurance policy

Reasons for Converting to Permanent Life Insurance

There are several reasons why converting your term life insurance policy to a permanent one could be beneficial:

• Change in Health: If your health has deteriorated, converting to a permanent policy allows you to extend your coverage without undergoing another medical exam. This option may be particularly valuable if your health issues would make it difficult or expensive to obtain a new term policy.
• Increased Income: If your income has increased since you first purchased your term life insurance, you may now be able to afford the higher premiums typically associated with permanent policies.
• Desire for a Cash Value Asset: Permanent life insurance policies offer the benefit of building cash value, which can be accessed tax-free during retirement or for other purposes. This can be a useful addition to your retirement savings.
• Leaving a Legacy: If you want to leave an inheritance for your children but don't want to compromise your retirement spending, converting to a permanent policy can help achieve both goals. The permanent policy will provide a death benefit to your beneficiaries, regardless of when you pass away.
• Final Expenses: Even if you don't have children or other dependents, you may want to ensure your funeral expenses are covered. Converting a portion of your term policy to permanent coverage can help achieve this.
• Change in Family or Business Obligations: Permanent life insurance can be useful for covering long-term financial obligations, such as caring for a child with special needs or managing unexpected business expenses.

Understanding the Conversion Process

When considering converting your term life insurance to a permanent policy, here are the key steps to follow:

• Check Your Policy: Review the terms of your current term life insurance policy to see if it includes a conversion option. Most policies offer this provision, but it's important to confirm.
• Determine the Conversion Period: Some companies allow policyholders to convert at any time during the term, while others may limit the conversion period. For example, you may only be able to convert during the first 10 years of a 20-year term policy. Understanding this deadline is crucial.
• Contact Your Insurance Company: Get in touch with your insurance agent or company to initiate the conversion process. They will guide you through the necessary steps, which typically do not include a new medical exam or underwriting process.
• Choose the Type of Permanent Policy: Different types of permanent life insurance policies are available, such as whole life, universal life, or variable universal life. Each has its own pros and cons, so be sure to understand the features and costs of each before making a decision.
• Calculate the New Policy Cost: Converting to a permanent policy will generally result in higher premiums. Consider the impact on your budget, both now and in the future, to ensure you can afford the increased cost. You may have the option to convert only a portion of your term policy to permanent coverage to manage costs.
• Complete the Conversion: Work with your insurance agent or financial advisor to finalise the conversion. This typically involves reviewing and signing a new contract.

Factors to Consider Before Converting

Before making the decision to convert, there are several important questions to ask yourself and discuss with your insurance agent or financial advisor:

• What is Your Goal?: Understand your objective for converting to a permanent policy. Are you seeking extended coverage, building cash value, or leaving an inheritance? This will help you choose the most appropriate type of permanent policy.
• Can You Afford the Higher Premiums?: Permanent life insurance policies typically come with higher premiums. Consider not only your current budget but also your expected financial situation in retirement. You may find that extending your term policy or purchasing a new term policy is more affordable.
• What Permanent Policies are Available?: Different insurance companies offer varying permanent policy options for conversion. Some may restrict you to specific types of permanent policies, such as universal life. Understand the options available to you before committing.
• Are There Additional Benefits?: Some permanent policies offer the option to add coverage for long-term care or a rising death benefit. Consider whether these benefits align with your goals and needs.
• Are There Better Alternatives?: If you are in good health, it may be worth shopping around for alternative term or permanent policies from other insurers. Compare rates and benefits to ensure you are making the most informed and cost-effective decision.

Cost Implications of Converting

While there are typically no direct fees associated with converting your term life insurance policy to a permanent one, it is important to understand the cost implications:

• Increased Premiums: The premiums for permanent life insurance policies are generally higher than those for term policies. The exact increase will depend on factors such as your age, the amount of coverage, and the type of permanent policy you choose.
• Impact of Partial Conversion: If you choose to convert only a portion of your term policy to permanent coverage, it can help manage costs. The premium for the permanent policy will be lower, and the premium for the remaining term policy will also decrease due to the reduced benefit.
• Timing of Conversion: The timing of your conversion may impact the cost. Some insurers offer credits or discounts if you convert within the first few years of your term policy. On the other hand, waiting until later in the term may result in higher premiums due to your increased age.
• Type of Permanent Policy: The type of permanent policy you choose will also affect the cost. For example, a whole life insurance policy will generally have higher premiums than a universal life insurance policy.

In conclusion, converting your 20-year term life insurance policy to a permanent one can provide extended coverage and additional benefits, but it is important to carefully consider your goals, budget, and available options before making this decision.

Buying a new term life insurance policy

When your 20-year term life insurance policy is coming to an end, you have a few options to consider. Firstly, you can choose to simply let the coverage expire and go without life insurance, especially if your children are financially independent and you have enough saved assets to take care of your partner.

However, if your family still requires financial protection, you have three main options:

• Extend your current term policy: Most term life policies have a guaranteed renewability feature, which allows you to renew your coverage without undergoing a new medical exam. However, the insurance company will typically increase your premium. While this option can be useful in certain situations, it may not be the most cost-effective choice in the long run.
• Convert your term policy to a permanent policy: Many term life policies now include a conversion option or rider, allowing you to switch to a permanent, whole life insurance policy. This option provides lifelong coverage and includes a cash value component that can grow over time and be borrowed against or withdrawn. However, the premiums for permanent policies are typically higher, and you may have a limited set of permanent policy options available.
• Buy a new term life policy or a permanent life insurance policy: Purchasing a new term life policy or a permanent life insurance policy can be a good option if your health status is still good. However, keep in mind that you will likely need to undergo a new medical exam, and the premiums will be higher due to your increased age.

When deciding which option to choose, it is important to consider your current health status, financial situation, and the level of coverage you require. Additionally, assessing your long-term goals and consulting with a financial professional can help you make the most informed decision.

Buying a permanent life insurance policy

Permanent life insurance policies are designed to last for the entirety of the policyholder's life, as long as the premiums are paid. They are more expensive than term life insurance policies but provide more benefits. Permanent life insurance policies have a cash value component, which grows over time and can be borrowed against or withdrawn. This cash value is also tax-deferred, meaning that policyholders won't have to pay taxes on the gains until they withdraw them.

There are two main types of permanent life insurance: whole life insurance and universal life insurance. Whole life insurance has a fixed premium, a guaranteed death benefit, and a guaranteed rate of cash value growth. Universal life insurance offers more flexibility, allowing the policyholder to adjust their premiums and death benefit as their needs change. The cash value growth of universal life insurance is typically tied to market interest rates.

When buying a permanent life insurance policy, it is important to consider your unique needs and circumstances. Permanent life insurance is a good option for those who want lifelong coverage and the ability to build cash value. It can be particularly beneficial for families with young children, business owners, high-net-worth individuals, and individuals with special needs.

To get the most out of a permanent life insurance policy, it is recommended to choose the right type of policy, pay premiums on time, monitor and adjust the policy as needed, and consider working with a financial professional to optimize coverage and integrate it into your overall financial plan.

Cancelling your 20-year term life insurance policy

Step 1: Understand the Consequences

Before cancelling your 20-year term life insurance policy, it's important to understand the consequences of doing so. By cancelling your policy, you will lose the financial protection it provides for your loved ones in the event of your death. Additionally, you may not get any money back from the premiums you've already paid.

Step 2: Evaluate Your Reasons

Take the time to carefully consider your reasons for cancelling your policy. Ask yourself if your circumstances have changed, such as your family growing up or no longer having financial dependents. Also, evaluate your financial situation and whether you can still afford the premiums. It's important to weigh the pros and cons before making a decision.

Step 3: Contact Your Insurance Provider

If, after careful consideration, you decide to cancel your 20-year term life insurance policy, the next step is to contact your insurance provider. Let them know of your decision and ask about any specific requirements or forms that need to be filled out. They will guide you through their cancellation process.

Step 4: Stop Paying Premiums

One of the simplest ways to cancel your policy is to stop paying the premiums. Inform your insurance company that you wish to discontinue payments, and they will process the cancellation. Keep in mind that this may result in a lapse in coverage, and you may not receive a refund for any prepaid premiums.

Step 5: Explore Alternative Options

Before cancelling your policy, it's worth exploring alternative options to maintain some level of coverage. You could consider reducing your coverage amount, which may lower your premiums and make it more affordable. Alternatively, you could withdraw or borrow against the cash value of your policy, but keep in mind that this will reduce the death benefit.

Step 6: Confirm Cancellation

Finally, once you have initiated the cancellation process, be sure to confirm that your policy has been successfully cancelled. Contact your insurance provider to ensure all necessary steps have been taken and that your policy is no longer active. This will give you peace of mind and help you avoid any potential lapses in communication.

Frequently asked questions