Term life insurance provides a death benefit for a specific amount of time, such as 10, 20 or 30 years — thus the name. If life insurance is no longer needed once the term policy expires, you’ll no longer pay a premium and the policy will end. However, there are a few options for those who still need life insurance coverage after their term policy expires.
What happens when term life insurance expires?
While term coverage is often purchased with the assumption that any dependents will be grown and financially independent by the time it expires, that is not always the case.
Generally, when term life insurance expires, nothing happens. A notice is sent by the insurance carrier that the policy is no longer in effect, the policyholder stops paying the premiums and there is no longer any potential death benefit. If there was a return-of-premium policy, a check would be sent for the amount paid into the policy throughout its term.
The exception is if there is a term conversion rider on your policy. This endorsement allows the insured to convert the term policy to a permanent insurance policy at the end of the term without going through the underwriting process again. This is an option worth considering for people who need coverage but whose health has declined and do not want to have a medical exam.
Purchasing coverage after you outlive your term life insurance
Those who will need further coverage after the term policy expires should consider starting the process and evaluating other options six months to one year before the policy expires.
As noted, some policies allow a term conversion at the end of the policy’s term. With this option, the policy is switched to permanent status as dictated by the policy documents. The rates will likely increase, but it allows the insured to keep the same coverage as before. For many people, converting rather than purchasing a new policy may be cheaper.
Purchase a new term policy
For the relatively young who are in good health, the most inexpensive option might be to purchase a new term policy. Costs may also go down if a lower death benefit and a shorter term are purchased, which is a good option for people whose needs have changed since purchasing the initial term policy.
For example, for someone whose youngest child is still in high school when their 20-year term policy expires, an additional ten-year policy may be sufficient to ensure that their dependent has completed college and no longer needs financial support from the estate.
Keep in mind that a medical exam will likely be part of the underwriting process for any new term policy, and if there are new health issues since the first policy, the rate will be higher. Age is also a factor — older people pay more for life insurance.
Purchase a permanent policy
Another option for those who do not have a term conversion rider on their policy is to purchase a more permanent form of life insurance after the term policy expires. It is important to keep in mind that permanent policies, such as whole life insurance, are more expensive than term — sometimes as much as ten times more expensive.
The benefit is that a permanent policy is valid until death as long as the premiums are paid. Permanent policies also have a tax-deferred cash value. A portion of the premium is placed in a savings vehicle where it grows and can be accessed if a loan is needed. Although the cash value portion will probably not earn as much interest as some other investments, such as the stock market, it is generally safe and can play a key role in financial planning.
Some experts don’t recommend permanent policies for everyone, often because of the cost, but there are certain circumstances where these policies may make the most sense. For instance, permanent policies may be a good choice for someone who has a child with a disability who will never be financially independent or a non-working partner who would need help maintaining their lifestyle if the working partner dies.
Final expenses insurance
For those who don’t want to burden their heirs with end-of-life expenses and don’t need a significant payout, one type of permanent insurance that may work is final expenses or burial insurance. This type of permanent policy, intended to cover funeral costs and any outstanding debts, is moderately low-cost but also has a low payout — usually no more than $25,000.
Unlike most permanent policies, there is no medical exam required. It is a good choice for older adults whose primary goal is to prevent their beneficiaries from facing financial challenges associated with their death.
Frequently asked questions
What is the best life insurance company?
There is no one company that is best for everyone. For those looking for life insurance, though, a good place to start is by reviewing the Best Life Insurance Companies of 2020, which takes a close look at the companies that rank high with consumers.
Which type of policy is better: term or permanent?
Again, everyone’s needs are different. Term policies are simpler and cheaper and can be a good choice for many people. Permanent insurance, however, can play a role in overall financial strategy, and the savings component means it’s possible to borrow on the policy if needed.
Do I need life insurance if I have no dependents?
It’s probably not as high a priority as if you had children or other dependents, but life insurance can help achieve a legacy that might otherwise be out of reach. Some people choose to endow a scholarship at their favorite college or use it to help their local animal shelter. Talk to your insurance agent to determine what will work best for you.