When purchasing a term life insurance policy, you will pay premiums every month in order to make sure that you keep your coverage. As you pay these premiums, you may be curious as to what happens when your policy ends. Once your term is completed, your coverage will end and payments to your insurance company will ultimately come to a stop. If you end up outliving your coverage, then the funds are forfeit.
These premiums from individuals who do not pass away within the timeframe of their coverage allow the insurance companies to fulfill the payouts needed for other individuals that do. With that being said, you may have a few other questions pertaining to life insurance, such as where your money goes for a term life insurance policy, what to do if you wish to continue to being covered, and what if you have a return of premium term policy.
In this article, we will address all of these questions and ensure that you thoroughly understand these concepts.
Where Does the Money Go for a Term Life Insurance Policy?
Whenever you pay your life insurance premiums, these end up going into a large “bucket” that is managed by the life insurance company. With many individuals putting money toward this, it allows life insurance companies to be able to provide payouts to those that need it. They do this by taking whatever the amount of money that is owed to the individual out of the sum that everyone has contributed to. Your money ultimately aids other families and individuals in need of financial support for anything that they are in need of paying, whether it be funeral cost, medical bills, etc. This applies to you as well if you were to pass away within the timeframe of your life insurance coverage, in which your family will receive financial compensation.
The entire point of term life insurance is to ensure that your family will be compensated if you were to pass away unexpectedly. Life insurance policies are pretty much placed there as a safeguard for you and other individuals that have purchased the coverage. If you have outlived your coverage, then be assured that your money will go to use toward other families that are in financial need.
Am I Able to Continue to be Covered with a Term Life Insurance Policy?
If you want to continue coverage and your term life insurance policy is coming to an end, then you may want to ensure that your family is protected through converting your policy into a permanent one. You are able to convert your term life insurance policy into a permanent one with ease, and most life insurance companies have a conversion rider included automatically. The rider ensures that you will not be deemed as uninsurable by the insurance company, no matter what your age or health status may be. Therefore, if you are seeking to continue coverage, convert your policy into a permanent one.
I Have a Return of Premium Term Policy, Would I get a Refund?
A return of premium (ROP) term life insurance policy is basically a term life policy with a rider attached that returns all of your premiums to you if you have outlived your term. This form of coverage is extremely beneficial because the premium money that is returned to you is completely tax-free, simply because it is not considered to be income but more of a refund of premiums. While you may either have this form of coverage or may be considering it, it is important to thoroughly understand the advantages and disadvantages of this coverage, especially if you are getting older.
Some of the advantages include the following:
- This policy will pay out a death benefit if you are to die during the term
- Premiums are paid to you if you are to outlive the term of the policy
- Return of premium life insurance acts like a savings plan, which forces you to add to your savings monthly
- Refund is tax-free
- Various ROP policies build a cash value that enables you to take loans out against it. These loans will have to be paid back or your death benefit will be reduced by the borrowed amount
Some of the disadvantages include the following:
- Premiums for a ROP policy are expensive and the price varies depending on factors
- Policy details vary among companies
- Canceling the policy before the term expires results in a much smaller refund (or none at all)
- You are able to make more money investing the price difference between a normal term policy and a ROP policy
Overall, if you are seeking to receive a refund for your life insurance coverage down the road, then a return of premium policy may be an option for you. This option is much more expensive and if you were to cancel the policy before the term ends, you may not receive a refund at all. If you have a term life insurance policy, then you will not receive a refund if you are to outlive the coverage. Regardless, life insurance is a must for most individuals and can protect your family financially if something unexpected was to happen to you.