Maximizing Life Insurance Benefits: Strategies For Outliving Policies

Term life insurance is only meant to last for a fixed period, typically 10 to 30 years. If you outlive your term life insurance policy, you will no longer have coverage, but there are options to extend it. You can either convert it to a permanent life insurance policy or buy a new term life insurance policy. If you have paid off your debts and your savings can support your retirement and end-of-life expenses, then you probably don't need life insurance anymore, and you can let your policy expire.

You can convert your term life insurance into permanent insurance

Converting your term life insurance into permanent insurance is a strategic choice for those who develop a health condition or become otherwise uninsurable but still need life insurance after their term policy ends. Here's what you need to know about making the switch:

How to Convert Term Life to Permanent Life Insurance

First, check your policy to see if conversion is an option. Most term life insurance policies offer the possibility to convert them into permanent life insurance policies. Next, check the term conversion period, or the timeframe during which you can convert. Some companies allow policyholders to convert at any point during the term of their policy, while others limit the conversion period. For example, a 20-year term policy might only allow conversions during the first 10 years.

Then, contact your insurance agent or company to initiate the conversion process. You won't need to take a life insurance 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.

The Cost of Converting

There are typically no fees associated with converting a term policy to a permanent policy. However, your premium, or the rate you pay for coverage, will increase. The amount of the increase depends on several factors, including your age at the time of conversion, the amount you choose to convert, and the type of permanent policy you select.

Reasons to Convert a Term Life Policy

There are several reasons why you might consider converting your term life insurance to a permanent policy:

• Change in health status: Converting to a permanent policy allows you to extend your coverage without undergoing the underwriting process again. This is especially valuable if your health has deteriorated, as it may be difficult or extremely costly to obtain a new term policy.
• Change in budget: If your financial situation has improved and you can now afford the higher premiums associated with permanent life insurance, converting may be a good option.
• Desire for a cash value asset: Permanent life insurance policies build cash value over time, providing a tax-free source of funds that can be accessed during retirement or for other purposes.
• Wish to leave a legacy: Converting to a permanent policy ensures that your beneficiaries receive a death benefit payout, allowing you to leave an inheritance for your children or grandchildren without compromising your retirement spending.
• Need to cover final expenses: Converting a portion of your term policy to permanent coverage can help ensure your loved ones aren't burdened with funeral costs and other final expenses.

Questions to Ask When Considering Conversion

Before making the decision to convert, ask yourself the following questions:

• What is your goal in converting? Understand your objectives and discuss them with your insurance agent to choose the right permanent policy for your needs.
• Can you afford the higher premiums? Consider not only your current financial situation but also your ability to continue paying the higher premiums during retirement.
• What permanent policies are available to you? Different insurers offer different options for conversion, so check with your insurer to see what permanent policies are available to you.
• Can you get a long-term care benefit? Some permanent policies offer the option to add coverage for long-term care, but this may only be available with certain types of permanent policies.
• Can you get a rising death benefit? If you want a permanent policy with a higher death benefit than your current term policy, you may need to undergo the underwriting process again, unless your insurer offers a permanent policy with a rising death benefit.

Types of Permanent Life Insurance

When converting your term policy, you will typically have the option to choose from whole life, universal life, or variable universal life insurance. Here are some pros and cons of each type:

Whole Life Insurance:

• Pros: Longer-lasting coverage, consistent premiums, cash value accumulation, and potential support for estate planning.
• Cons: Higher costs than term life insurance, potentially indefinite premium payments, difficulty in accessing cash value, and a lower cash value growth rate compared to other investment strategies.

Universal Life Insurance:

• Pros: Longer-lasting coverage, cash value that earns interest, premium payment flexibility, and potential support for estate planning.
• Cons: Higher costs than term life insurance, difficulty in accessing cash value, flexible payments with limitations, and a lower cash value growth rate compared to other investments.

Variable Universal Life Insurance:

• Pros: Longer-lasting coverage, cash value with potential for greater gains or losses through subaccount investments, and premium payment flexibility.
• Cons: Higher costs than term life insurance, complexity compared to term insurance, difficulty in accessing cash value, flexible payments with limitations, and investment risks associated with market-based investment options for cash value.

You can buy a new term life insurance policy

If you outlive your term life insurance and still need coverage, you can buy a new term life insurance policy. This is the most inexpensive option for those who are relatively young and in good health.

When purchasing a new term life insurance policy, you don't need to buy the same coverage amount or term length as your original policy. You can opt for a much lower death benefit and a shorter term, which will lower your premium costs. For example, if your youngest child is still in high school when your 20-year term policy expires, an additional 10-year policy may be sufficient to ensure your dependent has completed college and no longer needs your financial support.

Keep in mind that a medical exam will likely be part of the underwriting process for any new term policy. If your health has changed since your first policy, your rate will likely increase. Additionally, age is also a factor – older people pay more for their term life insurance policies.

You can renew your term coverage

If you outlive your term life insurance, 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 especially beneficial if you develop serious health issues, as 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.

However, it is important to note that the premiums for renewed policies can be far higher than your initial fixed premium. For example, if you purchased a $500,000 20-year term life insurance policy when you were 30, your annual cost may have been $244. If you choose to renew the policy when it expires and you are 50, the annual premium may increase to $2,989. Each year you renew, these premiums will continue to increase.

Therefore, while renewing your term coverage can be a valuable option in certain circumstances, it is important to carefully consider the potential costs and how they fit into your financial plan.

You can go without life insurance

If you outlive your term life insurance, you can choose to go without life insurance. This is a viable option if you no longer have dependents, have no significant debt, and have sufficient savings or other assets to cover any remaining obligations. However, it is important to carefully consider your financial situation and future needs before making this decision. Here are some factors to consider:

• Financial independence of dependents: If your children or other dependents are financially independent, you may not need life insurance coverage.
• Paid-off debts: If you have paid off your major debts, such as your mortgage, and have sufficient savings or assets, you may not need continued coverage.
• Retirement savings: If you have adequate retirement savings and investments to cover your living expenses, life insurance may be unnecessary.
• Spouse's financial stability: If your spouse or partner is financially secure and does not rely on your income, the need for life insurance may be reduced.

It is crucial to assess your financial situation and future needs to determine whether going without life insurance is the right choice for you. Consult a financial advisor or licensed insurance professional to make an informed decision based on your specific circumstances and goals.

You can buy return of premium life insurance

Return of premium (ROP) life insurance is a type of insurance that reimburses you for the money you paid in premiums if you outlive the policy term. ROP is available as a stand-alone policy or as a rider that can be added to a life insurance policy.

When you buy a stand-alone ROP policy, you select a term length, such as 20 or 30 years. If you die during that time, your beneficiaries will receive a death benefit payout. But if you outlive the policy, you will get a refund of the premiums you paid, without interest. The refunded money is not taxable as income.

Unlike regular term life insurance, ROP builds cash value over time. This means that once you've accumulated enough cash value, you can borrow against your policy, withdraw the money, or surrender the policy for cash if you no longer need coverage.

Who offers ROP?

Several insurance companies offer ROP policies, including State Farm, Cincinnati Life, and Illinois Mutual. State Farm's ROP policy offers coverage starting at $100,000 for individuals aged 18 to 60. Cincinnati Life's Termsetter ROP policy can be customized with multiple life insurance riders and is available in 20-, 25-, and 30-year terms. Illinois Mutual's ROP policy is available for individuals aged 18 to 60 and offers coverage of up to $500,000.

ROP policies tend to be more expensive than regular term life insurance. For example, a healthy 40-year-old looking to buy a 20-year, $500,000 policy can expect to pay nearly five times as much for a return-of-premium policy compared to a standard term life insurance policy.

However, ROP may be worth considering if you are uncomfortable with the idea of paying into a life insurance policy that may expire and you can afford the higher premiums. Just be sure to pay your premiums on time and avoid canceling your policy, as you might not get your money back if you do so.

Frequently asked questions