If you have a term life insurance policy that will expire soon, you may be wondering what will happen to your policy and what you may have for options. Fear not! If you still need life insurance coverage you almost certainly have the ability to continue to be covered. You may also wonder if you will get a payout at the end of the term, or if your premiums will be returned. We will explain exactly what happens when your policy term expires and what you can do to maintain life insurance coverage.
Term Insurance Expires- At a Level Premium
A key aspect of term life insurance is that the coverage expires. While it can be renewed for some time, the level premium charged during the original term period expires. In other words, the coverage is not meant to be permanent because the price goes up so much after the expiration date and will eventually end. This is by design, and it allows term life insurance to be much less expensive than permanent forms of life insurance such as whole life. If there is not a death during the term coverage period, the term policy does not pay-out.
The length of term life insurance is decided when you apply for the policy. Life insurance companies generally have policy lengths in increments of 5 years, up to 30 and sometimes even 40 years today! There is also another type of term that expires at a certain age. Today, this may 105 years old, so in effect, it is meant to provide coverage for an entire lifetime. As with every life insurance policy, the tradeoff is cost and features. Typically the price will rise every year with this policy type. No matter the type of term, it is important to remember that it has an expiration date, and does not have any cash value.
Continue Coverage At Renewal Rate
If you have a term policy that has reached the end of its guaranteed “term period”, you actually do have the option to continue the coverage under the current policy. Unfortunately, this is an extremely expensive option. This is called a renewal, and it is at a premium many times higher than the level premium that was paid during the guaranteed period. The reason that life insurance companies charge so much, is that they assume if you were in good health you would purchase a new term life insurance policy, and only the people who are at the highest risk of dying would continue the coverage at the renewal rate. In life insurance lingo, this is known as an adverse selection risk to the life insurance company. The life insurance company does not want this risk, so they compensate by making the price very high.
Continuing coverage at the renewal rate generally only makes sense if the insured person can not obtain coverage otherwise. If the person is insurable, it is almost always less expensive to obtain a new policy than to renew the policy. Typically, the policy can be renewed on a year to year basis, for as long as the original term of the policy. However, there is usually a maximum age, such as 60 or 65, where even the renewal coverage expires.
Sometimes, people will renew a policy for a short period of time so that they do not have any gaps in coverage, in case a new policy has not yet been issued.
The bottom line is that continuing coverage with the term renewal is usually a bad idea. It should only be renewed for a short period of time, or if this is the only option to maintain coverage and keep some life insurance in force.
Another Possible Option- Convert the Policy to Whole Life
Term life insurance normally comes with an option to convert part or all of the policy to a whole life insurance policy without any additional underwriting. Sometimes this can be done until a certain year of the term such as the 1oth year, and sometimes it can be done until the end of the term period. It is normally not allowed during the renewal period, so beware of the limits on the conversion period, which is the timeframe where conversion to whole life is allowed.
When the policy is converted to whole life, the premium will go up because whole life insurance is so much more expensive than term. The policy age will be the age of the insured at conversion, not the original term policy age. There will not be new underwriting though, so whatever health classification was assigned to the term policy will also carry forward to the whole life policy. This can be a useful way to lock-in insurance coverage for good. This is especially useful if you are no longer insurable due to a decline in health from the time that the term policy was issued.
Evaluate Coverage Needs- Get a New Policy or Go Without Coverage
As a term policy nears expiration, it is a good time to evaluate what your life insurance needs are. Life can change a lot over the course of a policy, and people will usually move or buy a new home, have additional children and grandchildren, divorce or marriage can happen, or children can grow and no longer be dependent on their parents for income. People also change jobs, and their financial wellbeing can change. All of these things can lead to different needs for life insurance.
After evaluation, you may find that you need less insurance or none at all. Conversely, you may find that you need more coverage than you did before. You could also find that you need permanent coverage or shorter term coverage.
Everyone should speak with a professional advisor before a life insurance policy expires. They can do a full analysis, which includes projections about personal finances into the future. If a new policy needs to be applied for, give plenty of time to go through the application process and get the new coverage issued before the existing policy expires, that way there won’t be any gaps in the coverage.
If it is determined after the analysis that no coverage is needed, the existing coverage can expire.