Life Insurance: Term End Options And Your Coverage

Term life insurance provides coverage for a specific period, typically between 10 and 30 years. When this period ends, the policy's coverage ends, and the policyholder stops paying premiums. This means that if the policyholder passes away after the policy ends, their beneficiaries will not be eligible to receive a death benefit. However, there are several options available to extend or replace coverage.

Extending your current term policy

Technically, you can keep renewing your policy on a year-to-year basis until you are 95 years old, as most term life policies have a guaranteed renewability feature. This feature lets you extend your coverage without going through a new underwriting process or medical exam. However, the insurance company will change your premium if you extend, and this premium will generally increase more every year. Therefore, while this can make sense for some people, it may not be the best choice for most.

If you are considering extending your current term policy, it is important to assess your current financial situation and future needs. Consult with a financial advisor or licensed insurance professional to help you make an informed decision based on your specific circumstances and financial goals.

Pros of extending your current term policy

• It may be the only way to continue having life insurance due to a change in health. If someone has been diagnosed with a terminal or life-shortening illness, they may not qualify for a new policy that offers a substantial death benefit.
• You won't have to reapply or undergo another life insurance medical exam.

Cons of extending your current term policy

• The insurance company will typically raise premiums once the term is expired, and these premiums will generally increase more every year.
• For many people, this is only viable for a few years at most.

Converting your term policy to a permanent policy

Converting a term life policy to a permanent one is a straightforward process. First, check your current policy to see if conversion is an option. Most policies offer this, but it's always good to confirm. Next, check the term conversion period, which is the timeframe during which you can convert. Some companies allow conversions at any point during the policy, while others may limit the conversion period. For example, a 20-year term policy might only allow conversions during the first 10 years. It's important to be aware of any deadlines to ensure you don't miss the opportunity to convert.

Then, contact your insurance agent or company to initiate the conversion process. You won't need to undergo a new medical exam or go through the underwriting process again. Simply fill out a questionnaire, and your new permanent policy will be issued within a few days. There are generally no fees associated with converting a term policy to a permanent one, but your premium, or rate, will increase. The amount of the increase depends on several factors, including your age at the time of conversion and the type of permanent policy you choose.

Converting to a permanent policy offers several benefits. One of the main advantages is that it allows you to extend your coverage without going through the underwriting process again. This can be especially valuable if your health has changed or deteriorated, as it guarantees your insurability. Additionally, permanent policies offer lifelong coverage as long as premiums are paid and often include a cash value component that grows over time. This can be beneficial for estate planning and can be accessed tax-free during retirement.

However, it's important to consider the potential drawbacks as well. Permanent life insurance is inherently more expensive than term life insurance, and the premiums will be higher after conversion due to increased age. Additionally, the cash value component of permanent policies may not earn as much interest as other investment options, and accessing the cash value may come with fees or taxes.

When considering whether to convert your term policy to a permanent one, it's essential to evaluate your financial goals and needs. Ask yourself questions like: Do I still have dependents who rely on my income? Do I have significant debts or business obligations? Do I want to leave a legacy or have funds to cover final expenses? If the answer to any of these questions is yes, converting to a permanent policy may be a good option.

Getting a different life insurance policy

When a term life insurance policy ends, you can choose to get a different life insurance policy. Here are some options to consider:

Renewing your term life policy

Many term life insurance policies include a guaranteed renewability clause that lets you extend your coverage past its expiration date on a year-to-year basis. While your death benefit stays the same, your premium is likely to increase each year you renew. This option is ideal if you just need coverage for a few extra years.

Converting from term to permanent

If your policy has a conversion provision or term conversion rider, you can convert your term life policy to a permanent, whole life insurance policy. Most term life policies include a conversion provision, but it's always good to check your policy or contact your insurance company to confirm. With a permanent policy, you get coverage for the rest of your life, and it may be cheaper than buying a brand-new life insurance policy if your insurer doesn't require a new medical exam.

Buying a new term life policy

You can also buy a new term life policy from your current insurer or a different provider. Keep in mind that you'll need to go through the application process again and get a new medical exam, unless you qualify for simplified issue life insurance. Your premiums are likely to be higher compared to your old policy since they will be based on your current age and health status.

Purchasing a permanent life insurance policy

Another option is to purchase a permanent life insurance policy, such as whole life insurance. Permanent policies are more expensive than term life insurance but provide coverage for the policyholder's entire life, as long as premiums are paid. They also include a tax-deferred cash value component that grows over time and can be used as collateral for loans or withdrawn.

Mixing term and permanent life insurance

You don't have to choose just one type of policy. You could purchase term life insurance to cover a specific obligation, such as a mortgage, and a permanent policy for lasting insurance protection. For example, you could apply for a term policy to match the length and amount of your mortgage and a permanent policy to provide additional benefits to your spouse and children in the event of your death.

Accidental death insurance

If you don't qualify for term or permanent life insurance due to serious health issues, accidental death insurance could be an option. It often doesn't require a health exam, and premiums are typically lower than term or permanent insurance premiums. However, these policies only pay a benefit if death results from an accident and not from other causes, such as cancer or a heart condition.

When considering your options, it's important to assess your current financial situation, future needs, and life stage. Consulting a financial professional can help you understand the choices available and make an informed decision based on your specific circumstances and goals.

Understanding the pros and cons of each option

Option 1: Extend your current term policy

Pros:

• Your current term policy may include a guaranteed renewability feature, allowing you to extend your coverage and death benefit without undergoing a new medical exam.
• This option may be suitable if your health has deteriorated, as it may be challenging to obtain a new policy with a substantial death benefit.

Cons:

• Extending your current term policy will likely result in increased premiums based on your current age, and these premiums may continue to rise annually.
• The renewal option may only be viable for a few years due to the increasing premiums.

Option 2: Convert your term policy to a permanent policy

Pros:

• Converting to a permanent policy provides lifelong coverage and removes the worry of outliving your policy.
• Permanent policies offer a cash value component, allowing your premium dollars to grow over time and be borrowed against, used to pay premiums, or surrendered for cash.
• Converting your term policy may not require a new medical exam, making it a good option if your health has changed.

Cons:

• Permanent policies are generally more expensive than term policies due to the lifelong coverage and cash value component.
• You may have limited permanent policy options, and the premiums will be higher, especially if you maintain the same death benefit.
• Some companies may impose deadlines or age restrictions on policy conversions.

Option 3: Purchase a new term life policy

Pros:

• Purchasing a new term life policy may be the most cost-effective option if you are in good health and seeking substantial coverage.
• You can adjust the death benefit level to match your current needs.

Cons:

• You will need to undergo a new medical exam and provide evidence of insurability, which can result in higher premiums due to your increased age.
• The new policy may have a shorter term, and you may face challenges qualifying for the desired length of coverage due to your age.

Option 4: Purchase a permanent life insurance policy

Pros:

• Permanent life insurance provides lifelong coverage, ensuring peace of mind and removing the worry of outliving your policy.
• It offers a cash value component that grows over time and can be borrowed against, used for premium payments, or surrendered for cash.
• Permanent life insurance can be a valuable tool for estate planning and providing financial security for dependents with special needs.

Cons:

• Permanent life insurance is significantly more expensive than term life insurance, sometimes up to ten times the cost.
• You will need to undergo a new medical exam and provide evidence of insurability, resulting in higher premiums due to your age and health status.

Consulting a financial professional

Expert Guidance

Financial advisors are well-versed in the intricacies of life insurance policies and can provide clarity on the various options available, such as extending your current policy, converting to a permanent policy, or purchasing a new one. They can explain the pros and cons of each option, helping you navigate the complex world of insurance with confidence.

Policy Customization

Every individual's situation is unique, and a financial advisor can help tailor a policy to meet your specific needs. By assessing your financial obligations, beneficiaries, and anticipated expenses, they can guide you in choosing the right type of policy, coverage amount, and any additional riders or customisations that may be beneficial for your circumstances.

Health and Age Considerations

As you age, your health and medical history become more significant factors in determining your life insurance options and premiums. A financial advisor can advise you on how these factors may impact your ability to qualify for certain policies and assist you in finding the most suitable coverage, especially if you have experienced changes in your health.

Cost-Benefit Analysis

Financial advisors can provide valuable insights into the cost implications of different policies. They can help you understand the trade-offs between term and permanent life insurance, including the impact of age and health on premiums, and guide you in making cost-effective decisions that align with your budget and long-term financial goals.

Policy Comparison

With their industry knowledge, financial advisors can compare policies from different insurance providers to find the best fit for your requirements. They can explain the nuances of various policies, including term lengths, death benefits, cash value components, and investment options, ensuring you make a well-informed choice.

Ongoing Support

Consulting a financial advisor doesn't have to be a one-time engagement. They can provide ongoing support and guidance as your life circumstances evolve, helping you periodically review and adjust your life insurance coverage to ensure it remains aligned with your changing needs and financial situation.

Frequently asked questions