Term Life Insurance: Outliving Your Policy

Term life insurance is a type of insurance that covers a specific period, such as 10, 20, or 30 years. If the policyholder dies during the term, their beneficiaries will receive a payout. However, if the policyholder outlives the term, the policy will typically end without any further action or payout. In that case, the policyholder may have the option to convert their term life insurance into permanent life insurance or purchase a new policy.

You can convert to permanent life insurance

If you outlive your term life insurance, you will no longer have coverage. However, you can convert to a permanent life insurance policy or buy a new term insurance policy.

Understanding Term Life Insurance

Term life insurance is temporary and only stays in effect for a certain period, such as 10, 20, or 30 years. If you die during that period, your beneficiary will receive a payout from the insurance company. If you die after the policy has expired, there will be no payout.

Converting to Permanent Life Insurance

If your term insurance policy is expiring and you still require insurance, you have the option to convert it to permanent life insurance. This option is particularly useful if you have developed health issues that make obtaining new insurance challenging or expensive. Many term life insurance policies include a built-in term conversion rider, which allows you to convert your policy to a permanent one without undergoing a new medical examination. This can be especially beneficial if your health has declined, as it saves you money on premiums.

The timeframe for converting to a permanent policy varies by policy. Some policies only allow conversion within a specific period, such as the first few years, while others permit conversion until the end of the term. Conversion rates are typically based on the original risk class awarded when the policy was first taken out.

However, it is important to note that permanent life insurance is generally much more expensive than term life insurance. The premium on the new policy will be higher, and the cost of converting a large term policy may be prohibitively expensive. Therefore, some insurers offer partial conversions to make the transition more affordable. Additionally, some policies may have an expiration date for the conversion option, so it is important to check the terms of your policy.

Benefits of Converting to Permanent Life Insurance

Converting to permanent life insurance offers several advantages. Firstly, it provides lifetime coverage as long as the premiums are paid, whereas term life insurance expires after a certain period. Secondly, permanent life insurance policies include a tax-deferred cash value component that grows over time and can be used as collateral for loans or withdrawn. Finally, permanent life insurance ensures that your loved ones will receive a payout when you pass away, which may not be the case with term life insurance if you outlive the policy term.

You can buy a new term life insurance policy

If you outlive your term life insurance policy, you will no longer have coverage. However, you can choose to buy a new term life insurance policy.

Buying a new term life insurance policy

If you're still in good health, applying for a new term policy will probably be a good option to continue coverage. However, you'll have to start the application process from scratch. Your rates will be higher than before, as you are now older, and any new medical conditions will also affect your life insurance costs.

When you purchase a new term life policy, you can choose a coverage amount and term length that fits your current needs. For example, if you have nine years left on your mortgage, a 10-year policy might make sense. You will likely need less coverage than when you first got life insurance. A licensed agent can help you compare term life insurance quotes and get you the best policy to continue your coverage.

It is recommended that you start looking for a new policy at least six months before your current policy expires. This way, you can shop around without having a coverage gap that would leave your family without financial support.

You can renew your term life insurance policy annually

If you outlive your term life insurance policy, you will no longer have coverage. However, you can choose to renew your term life insurance policy annually. Many term life insurance policies offer the option to renew for a limited number of years without requiring evidence of insurability. This means that you can extend your coverage even if your health has changed. For example, a 10-year term policy may be renewable each year for up to 10 additional years. During each renewal, your premium will increase based on your current age.

Although premiums for renewed policies typically increase significantly each year, this renewability option is beneficial if you develop serious health issues. It ensures continued financial protection for your family without the need for a new medical exam. The increase in premiums due to age at renewal is usually less significant than the potential increase or inability to secure a new policy if you were to reapply after being diagnosed with a serious health condition. This makes the renewability feature a valuable safeguard against the uncertainties of future health issues.

It is important to note that term life insurance is temporary and only covers a certain period, such as 10, 20, or 30 years. If you die during that period, your beneficiary will receive a payout from the insurance company. If you die after the policy has expired, there will be no payout. Therefore, if your term insurance policy is expiring and you still have dependents relying on your income, you may need new insurance.

When a term life insurance policy expires, it typically ends without any action needed from the policyholder. The insurance carrier sends a notice, premiums stop, and there is no longer a death benefit. However, some term policies offer the option to renew annually after the initial term expires. This option can be useful if you develop health issues that make obtaining new insurance challenging.

If you are considering renewing your term life insurance policy annually, it is important to weigh the benefits and drawbacks. While renewing your policy can provide continued coverage and peace of mind, the premiums for renewed policies can be significantly higher. Additionally, it is essential to assess your current financial situation and future needs to determine if you still require life insurance coverage.

You can add a return-of-premium rider to your policy

If you don't want to lose the money you've spent on term life insurance premiums, you can add a return-of-premium rider to your policy. This optional add-on guarantees that you will get a refund of all or some of the premiums you've paid if you outlive the term of your policy. Without this rider, your coverage will simply end when the term is over, and you will not get a payout.

The return-of-premium rider transforms your insurance policy into both an investment and a protective tool. It ensures that you will receive a financial benefit from your policy, either through a death payout or a return of premiums if you outlive the term. This can be especially useful if you want to use the premiums to help pay for major expenses like college or retirement.

However, adding a return-of-premium rider to your policy will increase your premiums, sometimes substantially. The extra money you spend on higher premiums could potentially be invested elsewhere, earning a higher return. Additionally, if you cancel your policy before the term ends, you will typically not get a refund of your premiums.

The decision to add a return-of-premium rider depends on your financial goals, risk tolerance, and individual tax situation. If you are risk-averse and prefer a "no-risk" financial product, the rider can provide peace of mind. On the other hand, if you are comfortable with investing and can afford to take on more risk, you may be better off investing the extra money you would have spent on the rider.

You can let your policy expire

If you outlive your term life insurance policy, you can let your coverage end without taking further action. Your insurance carrier will send you a notice, and once your term ends, your premiums will stop, and there will be no death benefit.

However, if you still need life insurance coverage, you have several options to consider. Firstly, you can choose to extend your current term life insurance policy. Many policies offer annual renewals for a limited number of years, allowing you to maintain your original coverage amount. While this option ensures continued coverage, it tends to be expensive, with premiums increasing each year due to age-related risk factors. Nevertheless, it is a valuable option if you have health issues, as it does not require a new medical exam.

Another option is to convert your term life insurance policy into a permanent life insurance policy. Permanent life insurance provides lifelong coverage as long as premiums are paid and includes a cash value component that grows over time. While this option is more expensive than term life insurance, it may be a good choice if your health has declined, as you won't have to go through underwriting again and can retain your original health classification.

Alternatively, if you are in good health, you may opt to purchase a new term life insurance policy or a permanent life insurance policy. This will involve starting the application process from scratch and may result in higher rates due to your increased age and any new medical conditions.

Frequently asked questions