Life Insurance: Benefiting The Living, Not Just The Dead

Life insurance is a financial safety net that provides financial protection to your loved ones in the event of your death. There are two types of life insurance policies: term and permanent. Term life insurance is temporary and has an expiration date, whereas permanent life insurance lasts your entire life. If you outlive your term life insurance policy, your coverage ends, and you stop paying premiums. However, you may have the option to convert it to permanent life insurance or renew your term coverage. Additionally, if you purchase return-of-premium life insurance, you can get a refund of your premiums if you outlive your term policy, but this option is more expensive. Understanding the specifics of your policy and consulting a financial advisor can help you make informed decisions about your life insurance choices.

You can get a refund if you add a rider to your insurance coverage

Life insurance is an important part of any financial plan, but what happens if you don't die during the term of your policy? Many people worry about losing out on the premiums they've paid if the death benefit isn't paid out. While term life insurance is an affordable form of protection, some consumers dislike the idea of paying premiums for years, only to end up with nothing if they outlive their policy.

The good news is that there is a way to get a refund if you don't die during the term of your policy: by adding a rider to your insurance coverage. This is called a return-of-premium rider and it's an optional add-on that you can include in your term life insurance policy. It guarantees that you'll either receive a death benefit payout or get a refund of the premiums you've paid if you outlive the term.

Here's how it works: when you buy a term life insurance policy, you can add the return-of-premium rider to your policy. This rider is not typically included as a standard feature and usually costs extra. You'll pay your premiums as usual throughout the policy term. If you're still alive at the end of the term, the insurance company will return all the premiums you've paid. The money is refunded to the policyholder, not the beneficiary. On the other hand, if you were to die during the policy term, your beneficiaries would receive the death benefit per the policy terms, but they would not get a return of the premium.

It's important to note that not all insurers offer return-of-premium coverage, and eligibility depends on factors such as age, health, lifestyle, and policy terms. Additionally, adding a return-of-premium rider can significantly increase the cost of your premium. The extra money spent on higher premiums could potentially be invested elsewhere, earning a higher return. There's also the risk of not receiving a refund if you cancel your policy before the term ends or fail to make timely premium payments.

While adding a return-of-premium rider to your insurance coverage can provide peace of mind, it's essential to carefully consider the potential drawbacks and weigh them against the benefits before making a decision.

You can convert term life insurance into permanent life insurance

If you outlive your term life insurance policy, the premiums you paid are kept by the life insurance company, and your coverage ends. However, you might have the option to convert it to another kind of insurance called permanent life insurance. Permanent life insurance is a category that includes whole life insurance. With this type of insurance, your loved ones are guaranteed to get a payout when you're no longer here, as long as you keep paying your premiums.

Converting Term Life Insurance to Permanent Life Insurance

Term life insurance policies typically offer the option to convert them into permanent life insurance policies. Converting a term life policy to a permanent policy is much simpler than applying for a new policy. 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, while others may 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 request 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. There are no fees to convert a term policy to a permanent policy, but the rate you pay for coverage—your premium—will increase. The older you are, the higher your premium will be. You also have the option to convert the full value of a term policy or just a portion of it.

Reasons to Convert a Term Life Policy

• You've 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 valuable if your health changes for the worse.
• Your budget has changed. You might have wanted to buy a permanent policy initially but couldn't afford the higher premium. If your income has increased, converting to a permanent policy might make sense if the higher premium fits within your budget.
• You want a cash value asset. One benefit of a permanent life insurance policy is that part of your premium goes toward the cost of insurance, and part of it goes toward building cash value. Some people want cash value life insurance to access the cash during retirement or for other reasons tax-free.
• You want to leave a legacy. If you want to be able to leave an inheritance for your children but don't want to scrimp during retirement, converting to a permanent policy can help. The permanent policy can be in force no matter when you die and will pay a death benefit to your beneficiaries.
• You want to have funds to cover your final expenses. Converting enough of a term policy to a permanent policy to cover final expenses could make sense to avoid saddling your family with paying for your funeral.

You can renew your term coverage

If you outlive your term life insurance policy, you can renew your term coverage. 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. For instance, 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 needing 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.

If your policy has guaranteed renewability, you can maintain your underwriting status and extend your coverage for short periods of time. You can usually renew the policy for one year, which gives you time to consider your options if you want coverage for longer. Extending your term policy comes at a cost, though. Your premiums will be exponentially higher than the low rate you enjoyed during the policy's original term. And the price will increase each year you renew.

When you renew a policy, insurers are assuming that you're paying the heightened premiums because you can't qualify for medically underwritten coverage. Extending your policy might make sense if you're in a situation where significant debts or financial dependents will be around for a short period (say, a year or two). It may also be a good option if you're unhealthy or have chronic health issues that would prevent you from qualifying for medically underwritten or simplified issue coverage.

If you're considering renewing your term coverage, it's important to weigh your options carefully. Compare the cost of renewing your current policy with the cost of purchasing a new term or permanent life insurance policy. Also, consider your current health status and whether you can qualify for a new policy. Consult with a financial advisor or licensed insurance professional to help you make an informed decision based on your specific circumstances and financial goals.

You can buy a new policy

If you outlive your term life insurance policy, you can choose to buy a new policy. This is a good option if you want to continue receiving coverage. However, it is important to note that the cost of premiums increases with age, and any changes in your health can impact how much you pay.

When buying a new life insurance policy, you will need to submit an application and provide basic information, including your Social Security and driver's license numbers. You may also need to submit an attending physician's statement and share details about your medical history, such as any chronic or pre-existing conditions. After submitting the application, you may be required to undergo a physical examination to get approved for coverage.

It is worth noting that you can add a return-of-premium rider to your new insurance plan. This rider guarantees a refund of the premiums you paid if you outlive the coverage period. However, this option is costly and may not be the best choice for everyone.

Before purchasing a new life insurance policy, it is advisable to consult a financial advisor or a licensed insurance agent. They can help you assess your financial situation, determine your coverage needs, and find a policy that aligns with your long-term and short-term financial goals.

Additionally, when choosing a new life insurance policy, consider factors such as the death benefit, living benefits, premium costs, opportunities for adjustments, the claims process, and the financial stability of the insurance company.

You can go without life insurance

Term life insurance is temporary and has an expiration date. If you outlive your term life insurance policy, your coverage ends, and you stop paying premiums. You only get a refund if you purchased return-of-premium life insurance, which is more expensive than traditional term life insurance.

If you have a term life insurance policy and are approaching the end of your term, you can choose to buy a new policy, convert the policy into a permanent one, or renew your term coverage.

Frequently asked questions