Term Life Insurance: Renewal, Revision, Or Release?

If your term life insurance policy is expiring, you may need to take action to ensure your loved ones remain financially protected. Term life insurance offers coverage for a set period, after which the policy expires and your beneficiaries will no longer be eligible for a payout. If you still have dependents or financial obligations, you may want to consider the following options: extending your current policy, converting to a permanent life insurance policy, or purchasing a new term life policy. Each option has its advantages and drawbacks, and the best choice for you will depend on your specific circumstances and needs.

Extending your current policy

If your term life insurance policy is expiring and you still require coverage, you can consider extending your current policy. Here are some key points to keep in mind:

Renewal Riders and Guaranteed Renewability:

Many insurers offer the option to extend your coverage through a renewal rider. This allows you to continue your current policy without undergoing new underwriting or medical exams. However, it's important to note that your premiums will be higher as they will be based on your current age, and the policy term may remain the same.

Annual Renewable Term Insurance:

When term life policies reach the end of their level premium period, they often become annually renewable. This means that by continuing to pay premiums, your policy will renew each year until it expires. However, the renewal process will result in higher premiums based on your attained age, and these premiums will likely increase annually.

Understanding the Impact of Age:

The premium for an extended policy will reflect your current age, as you present a higher risk to the insurance company than when you initially applied. Additionally, there may be caps on the age up to which you can extend your policy, so it's important to discuss this with your agent or insurer.

Conversion to Permanent Life Insurance:

Another option is to convert your term life policy to a permanent life insurance policy, which will provide coverage for the rest of your life as long as premiums are maintained. This option is available with most term policies and usually does not require additional underwriting or a medical exam. While permanent life insurance is more expensive, it offers level premiums and builds guaranteed cash value.

Comparing Options and Weighing Factors:

Before making a decision, it's important to compare different insurers and policy types. Consider the pros and cons of extending your current policy versus converting to permanent life insurance. Factors such as your health, anticipated financial obligations, and the level of coverage needed should be carefully considered.

Converting to a permanent policy

If your term life insurance policy is expiring and you still need coverage, you can convert it to a permanent life insurance policy. This is a good option if you've had a change in health, still have dependents, or have more debt than you anticipated.

Most term life policies include a conversion provision, but you should check your policy or contact your insurance company to confirm. Your term policy may also include a provision for converting to a whole life or universal life policy without a physical exam. The premium on the new policy will be higher than what you have been paying for term insurance. You may have the option of converting to a policy with a smaller death benefit in return for a lower premium.

Permanent life insurance provides coverage for a policyholder's entire life as long as premiums are maintained. It has a cash value component, which applies a portion of the paid premiums to an investment account that grows tax-deferred. This acts as a forced savings account; you can borrow or withdraw from it under some circumstances. For these reasons, permanent life insurance typically has higher premiums than term life insurance.

Whole life insurance policies are permanent policies with fixed premiums and cash value that grows at a specified rate. With universal life insurance, the premium and death benefit can be adjusted, allowing the policyholder some financial flexibility if their budget or needs change over time. The cash value component of universal life insurance grows at money market rates, which could potentially earn you more than a whole life policy that grows at a fixed rate.

An indexed universal life policy's cash value growth rate is linked to the performance of certain financial indexes, such as the S&P 500.

Buying a new term life policy

If your term life insurance is expiring and you still need coverage, you can buy a new term life insurance policy. This option may allow you more flexibility in choosing the policy term. However, there are a few things to keep in mind.

Firstly, you will likely have to take a new medical exam to get coverage. This is because your new policy will be based on your current age and health status, and the older you are, the more you'll typically pay for a policy.

Secondly, you will pay more in premiums since you will be older when applying. Your premiums may be less than if you renewed your old policy, but they will still be higher than what you were previously paying.

Thirdly, consider buying a second life insurance policy well in advance of your current one lapsing. This will help you avoid paying a higher premium.

Finally, if you are in good health and want a substantial level of coverage, a new term-life policy may be the most affordable option for you.

Getting permanent life insurance

Permanent life insurance provides coverage for the full lifetime of the insured person. It is more expensive than term life insurance, but permanent policies combine a death benefit with a savings component that earns interest on a tax-deferred basis.

The two primary types of permanent life insurance are whole life and universal life. The cash value of whole life insurance grows at a guaranteed rate. Universal life insurance also contains savings and a death benefit, but it features more flexible premium options, and its earnings are based on market interest rates. Variable life and variable universal life provide expanded options to invest the cash value in mutual funds and other financial instruments.

Permanent life insurance policies have much higher premiums than term life insurance policies, which lack a savings component. However, permanent life insurance policies have several advantages:

• They provide coverage for the full lifetime of the insured person.
• They combine a death benefit with a savings component.
• The savings component earns interest on a tax-deferred basis.
• The policy owner can borrow funds against the cash value through a policy loan or withdraw cash.

There are some disadvantages to permanent life insurance policies:

• The premiums are much more expensive than those for term coverage.
• There is a risk of not being able to afford to keep up with payments.
• Taking out the policy's cash value reduces the death benefit.

If your term life insurance is expiring and you are considering permanent life insurance, it is important to thoroughly research the firms and policies you are considering to ensure you get the best life insurance available.

Letting your policy expire

If you no longer need your term life insurance policy, you can simply let it lapse. When your term life insurance policy expires, the policy's coverage ends, and you stop paying premiums. This means that if you pass away after the policy ends, your beneficiaries will not be eligible to receive a death benefit.

Some policyholders may only need term life insurance for a certain period, such as to help protect a child until they reach adulthood and start their career. In this case, letting the policy expire without getting new coverage may be feasible.

However, if you still have dependents relying on your income, you may need new insurance. If you are in reasonably good health, you may be able to find an affordable policy. Some insurance companies write policies for applicants up to age 90, and some policies allow you to renew on this basis up to age 95.

If you have health issues, you may be able to purchase a portfolio of smaller policies that will add up to the coverage you need. These policies may not require a physical exam, but they may ask for some health information. You could also be eligible for group life insurance through your employer, a trade association, college alumni club, or another organization to which you belong.

Another option is final expense or burial insurance. These are typically whole life policies with relatively small payouts, such as $20,000 or $25,000. They may require no medical exam and will provide money that your beneficiaries can use for any purpose.

If you have a term life insurance policy that is due to expire soon, it is important to evaluate your options so that you can continue coverage seamlessly.

Frequently asked questions