Life Insurance: What To Do When Term Expires

Term life insurance provides coverage for a specific period, typically ranging from 10 to 30 years. Unlike permanent life insurance, term life insurance does not offer lifelong protection and expires once the term ends. However, policyholders have several options to extend coverage, including policy renewals or conversions, which can help maintain continuous protection. Understanding the implications of outliving term life insurance is crucial for effective financial planning.

Term life insurance renewal options

Term life insurance is a policy that provides coverage for a specific period, typically ranging from 10 to 30 years. When a term life insurance policy expires, the policyholder might still need coverage for various reasons, such as ongoing debts, dependents requiring financial support, or new financial obligations. While term life insurance policies typically end without further action from the policyholder, there are several renewal options available to extend coverage. Here are some key renewal options to consider:

Renewal Options:

• Yearly Renewable Term (YRT) Policy: This option allows policyholders to renew their coverage on a yearly basis without providing evidence of insurability. While the premiums increase each year as the insured person ages, it can be a good choice for those who need temporary insurance.
• Renew for a Limited Number of Years: Most term life insurance policies offer the option to renew for a limited number of years, even if the policyholder's health has changed. For example, a 10-year term policy may be renewable annually for up to 10 additional years, with premiums increasing based on the policyholder's current age.
• Convert to Permanent Coverage: Some term policies include a conversion rider, allowing policyholders to convert their term policy into a permanent policy, such as whole life or universal life insurance, without undergoing underwriting again. Conversion rates are based on the original risk class and typically result in higher premiums due to increased age.
• Purchase a New Term Policy: For younger and healthier individuals, purchasing a new term policy may be the most cost-effective option. However, it's important to note that a medical exam and new underwriting process may be required, and premiums will be higher due to age and any new health issues.
• Buy a Permanent Policy: If a term policy doesn't include a conversion rider, policyholders can opt to purchase a permanent life insurance policy after the term expires. While permanent policies are significantly more expensive, they offer lifetime coverage and often include a cash value component.

It's important to carefully review the renewal options and associated costs outlined in your term life insurance policy. Understanding these options in advance can help you make informed decisions about maintaining or extending your coverage.

Permanent life insurance conversion

Term life insurance is a type of insurance that provides coverage for a specific period, typically ranging from 10 to 30 years. When a term life insurance policy expires, the policyholder might find that they still need coverage for various reasons. While it’s common to purchase term coverage with the expectation that financial responsibilities will decrease over time, circumstances can change. For example, ongoing debts, dependents still needing support, or new financial obligations may prompt someone to extend their coverage.

If a term 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 on a year-by-year basis after the initial term expires. This option can be particularly useful for those who develop health issues that make obtaining new insurance challenging.

If you find yourself needing permanent coverage, many term policies include a conversion rider. This allows you to change your term policy into a permanent policy without needing to go through underwriting again. However, conversion riders have an expiration date—not all policies let you convert up until the end of the term.

Term life insurance policies are often convertible to permanent life policies, but not all policyholders take advantage of this option or are even aware of it. Converting to a permanent life policy might be right for you if you still need coverage at the end of the term.

Most term life plans are convertible to whole life insurance. Convertible policies usually include a limit as to when you can convert, generally before the term ends. There may also be an age limit at which it's no longer possible to convert your policy, so doing it early is advisable.

Converting to a permanent life insurance policy will result in higher premiums as you have aged, but you likely won't need another medical exam. Here are some reasons why you might want to convert to a permanent life insurance policy:

• You want to earn cash value with permanent life: Permanent life policies allow you to withdraw money while you're alive, providing the flexibility of an emergency savings source.
• You still need coverage at the end of your term life policy: Term life is often a more affordable option as it limits the number of years during which the insurance company might have to pay out. However, if you're reaching the end of the term and realize you need the coverage to last much longer, converting to permanent life is a good option.
• You're financially better off than when you bought your term life policy: As you age, you'll likely improve your financial situation and earn more money. That's a good time to convert to a permanent life policy, which will cost more but will also ensure lifelong coverage.
• You have health issues: Converting from a term life to a whole life policy may not require a medical exam. When you convert, the insurance company will likely give you the same health rating as your original term life policy.
• You have dependents who may need financial help after you die: Converting to permanent life can leave money behind for your dependents' care.
• You want to lock in premium rates: Permanent life insurance locks in rates, so you won't have to worry about rate increases or needing to change to another term life policy.

Buying a new term life insurance policy

When considering buying a new term life insurance policy, it is important to assess your financial situation, including your income, expenses, and any debts or liabilities. This will help you determine the amount of coverage you need and the length of the policy term. Here are some key factors to consider when purchasing a new term life insurance policy:

• Age and health: The younger and healthier you are, the lower your premiums are likely to be. Insurance companies will consider your age, gender, health, and lifestyle habits when determining your premium. Be honest and accurate when providing information about your health and medical history.
• Coverage amount: Consider your financial obligations and dependents when deciding on the coverage amount. It is generally recommended to have a sum assured that is 10-15 times your annual income. You can use an online term insurance calculator to estimate the appropriate coverage amount based on your income, expenses, and liabilities.
• Policy term: The policy term should cover you until your financial responsibilities are met, such as paying off loans or supporting dependents. You can choose a policy term that ends before your retirement or one that provides coverage for a longer period.
• Premium payment options: Term life insurance policies typically offer flexible premium payment options. You can choose to pay premiums annually, semi-annually, quarterly, or monthly. Consider your financial situation and budget when deciding on the payment frequency.
• Riders and add-ons: Term life insurance policies often allow you to add riders or add-ons to enhance your coverage. These may include critical illness coverage, accidental death or disability benefits, and waiver of premium benefits. Carefully review the available riders and select the ones that align with your specific needs and budget.
• Claim settlement ratio: It is important to choose a reputable insurance company with a high claim settlement ratio. This indicates the likelihood of your dependents receiving the claim benefit in the event of your demise. Look for companies with a claim settlement ratio of at least 95% or higher.
• Customer reviews and experience: Consider the experiences of other customers with the insurance company. Read online reviews and assess the company's customer service, claim settlement process, and overall satisfaction.
• Solvency ratio: Check the solvency ratio of the insurance company, which indicates their financial stability and ability to fulfil insurance obligations. A higher solvency ratio reflects a stronger financial position.
• Tax benefits: Term life insurance policies often offer tax benefits under applicable tax laws. Understand the tax implications of the policy and how it can help reduce your tax liabilities.
• Comparison and customisation: Compare different term insurance policies from multiple insurers to find the one that best suits your needs. Customise your policy by choosing the appropriate coverage amount, policy term, and riders to ensure adequate financial protection for your loved ones.

Buying a permanent life insurance policy

Term life insurance provides coverage for a specific period, typically ranging from 10 to 30 years. When it expires, you might still need coverage for various reasons. While it’s common to purchase term coverage with the expectation that your financial responsibilities will decrease over time, circumstances like ongoing debts, dependents still needing support, or new financial obligations may prompt you to extend your coverage.

If you're considering buying a permanent life insurance policy after your term life insurance expires, here are some things to keep in mind:

Understand the features of permanent life insurance:

Permanent life insurance, unlike term life insurance, is designed to offer lifelong protection. It combines life insurance with an investment component, allowing you to build cash value over time. This cash value can be accessed during your lifetime, providing flexibility for financial needs. However, permanent life insurance is generally more expensive than term life insurance.

Evaluate your long-term financial goals:

Consider whether you need coverage for a specific period or your entire life. Permanent life insurance may be suitable if you require coverage regardless of when you die, want to use life insurance to leave an inheritance, or need a policy to cover final expenses. On the other hand, term life insurance may be sufficient if you have a specific timeframe in mind, such as until your children graduate from college or your mortgage is paid off.

Compare different types of permanent life insurance:

There are several types of permanent life insurance policies available, including whole life, universal life, indexed universal life, and variable universal life. Whole life insurance offers fixed premiums and a guaranteed death benefit, while universal life provides flexible premiums and death benefits. Indexed universal life ties the cash value growth to a stock market index, and variable universal life allows you to invest the cash value in various options. Choose the type of permanent life insurance that aligns with your risk tolerance and financial goals.

Assess the cost and benefits:

Permanent life insurance policies are generally more expensive than term life insurance. Consider the lifetime coverage, cash value component, and safe investment opportunities offered by permanent policies. Evaluate the potential growth of the cash value component and whether it can be used to supplement your retirement savings. Additionally, consider the tax implications and any fees associated with the policy.

Consult with experts:

Discuss your options with a fee-based life insurance advisor or a licensed insurance professional. They can provide personalized advice based on your unique circumstances, financial goals, and risk tolerance. Their expertise will help you make an informed decision about purchasing a permanent life insurance policy that meets your long-term needs.

Cancelling term life insurance

Understanding the Process

Cancelling a term life insurance policy is generally a straightforward process. One effective way to cancel is by stopping your premium payments. Contact your insurance carrier directly to confirm the cancellation and ensure there are no further obligations on your part. Most insurers have forms or online options to finalise the cancellation quickly and conveniently.

Other Options to Consider

Before cancelling your term life insurance policy, it's worth exploring alternative options:

• Converting to a permanent policy: Many term policies include a conversion rider, which allows you to switch to a permanent policy without undergoing a new medical exam. This can be valuable if you want lifelong coverage and the ability to accumulate cash value within your policy.
• Reducing the policy's face amount: If premiums have become challenging to manage, consider reducing the policy's face amount. This can lower your premium payments and make the policy more affordable while still providing some level of coverage.

Cancelling a Permanent Life Insurance Policy

Cancelling a permanent life insurance policy, such as whole life or universal life, is more complex than term life insurance due to the accumulation of cash value. When you surrender a permanent life insurance policy, you may receive a payout from the cash value, but this is often reduced by surrender charges, especially if you haven't held the policy for a long period. Outstanding policy loans and withdrawals will also reduce the surrender value.

Alternatives to Cancelling a Permanent Policy

• Using cash value to pay premiums: You can use the accumulated cash value to cover premium payments or mortality costs, depending on the policy type. However, this may reduce the death benefit for your beneficiaries, and if the loan isn't repaid, it will be deducted from the policy's death benefit.
• Tax-free exchange: You can exchange your life insurance policy for an annuity or long-term care policy income tax-free, known as a 1035 exchange.
• Viatical or life settlement: If you have a terminal illness or are over 65 and in good health, you can sell your life insurance policy to a third party. A viatical settlement offers a lump sum payment, while a life settlement is for those who no longer need or can't afford the policy.

When to Cancel Your Life Insurance Policy

There are several situations when cancelling your life insurance policy may be appropriate:

• You no longer need coverage because your family is financially independent.
• You are changing your investment strategy and find that other financial vehicles offer better returns.
• You can no longer afford the premiums, although it's important to explore options to lower costs first.
• You are switching policies or insurance companies. Ensure your new policy is in force before cancelling your existing one to avoid gaps in protection.

Getting Money Back When Cancelling

Whether you receive a refund when cancelling depends on the type of policy and timing:

• During the free look period: You can typically get a full refund of premiums paid during the initial "free look" period, usually lasting 10 to 30 days.
• Term life insurance: There is no cash value, so you won't receive a payout when cancelling. However, you may get a partial refund for any unused portion of your premium if you cancel in the middle of a payment cycle.
• Permanent life insurance: You could receive a payout based on the cash surrender value, but this may be reduced by surrender charges and outstanding loans. Withdrawals will also permanently reduce the cash surrender value.

Frequently asked questions