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Term life insurance provides temporary coverage over a certain length of time, often between 10 and 30 years. Unlike a permanent life insurance policy, which offers lifetime protection under most circumstances, term life insurance coverage typically ends if you outlive the term. The only exception is when your term policy is renewable or convertible, which allows you to continue your coverage without purchasing another policy, provided you meet your conversion policy’s deadlines for conversion or renewal. If you have a term policy or are thinking about purchasing one, it can be helpful to know what happens if you outlive the term.
What happens when term life insurance expires?
While term coverage is often purchased assuming 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, the policy simply expires, and no action needs to be taken by the policyholder. A notice is sent by the insurance carrier that the policy is no longer in effect, the policyholder stops paying the premiums, and there is no longer any potential death benefit.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 the policyholder had 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, which allows the policyholder to convert the term policy to a permanent insurance policy as you near the end of the term, without taking another medical exam. This option may be worth considering for people who need coverage, but whose health has declined and might not be able to pass a physical exam. Keep in mind that conversion policies typically have strict deadlines for conversion, often several months before your policy expires. So if you have a conversion policy, make sure you are aware of when you have to convert it if that’s something you are interested in doing.
In addition, with some term policies, you might have the option to renew your term life insurance policy on an annual basis after the initial term expires. If you choose to renew your policy, you will keep the same amount of coverage you originally had, but you’re only covered for one year at a time. Each time you renew your policy, your premium will most likely increase, as term life premiums get more expensive with age to account for the increased risk to the insurance carrier.
Purchasing coverage after you outlive your term life insurance
Those who will need further coverage after the term policy expires may want to start evaluating other options six months to one year before the policy expires. That way, you’ll have time to add a term conversion rider to your current policy if needed.
As noted, some policies allow a term conversion at the end of the policy’s term. With this option, the policy is switched to a permanent life policy, without requiring a medical exam. Term conversion policies may come with higher rates, but they allow the insured to maintain coverage after their term ends, as long as the policy was converted before the policy’s stated deadline. For many people, converting rather than purchasing a new policy may be cheaper. While health status won’t be a variable in eligibility, your new premium will be based on your age at the time of conversion.
However, it’s important to know that convertible term life insurance takes proactive planning. You typically need to apply for the conversion several months or even a year before your original term’s end date. Plus, you need to have purchased a policy with a conversion rider to have this option in the first place. For example, if you buy coverage from a company that doesn’t offer permanent policies, conversion isn’t possible. Because not all term policies are convertible, it’s important to review your policy documents or speak to an agent to learn more about your options.
Purchase a new term policy
For the relatively young who are in good health, the most inexpensive life insurance option might be to purchase a new term policy. Premium costs may also go down if a much lower death benefit and a shorter term are purchased, which may be a good option for people who need less coverage than when they purchased their initial term policy.
For example, for someone whose youngest child is still in high school when their 20-year term policy expires, an additional 10-year policy may be sufficient to ensure that their dependent has completed college and no longer needs financial support from their parents’ income.
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 likely increase. Age is also a factor — older people pay more for their term life insurance policies.
Purchase a permanent policy
Another option for those who do not have a term conversion rider on their policy is to purchase a permanent life insurance policy after the term policy expires. It is important to keep in mind that permanent life policies, such as whole life insurance, are more expensive than term — sometimes as much as ten times more expensive (but it depends on a variety of personal factors and policy choices).
One of the benefits of a permanent policy is that the coverage is valid under most circumstances until death as long as the premiums are paid. Permanent policies also have a tax-deferred cash value account. A portion of the premium is placed in a savings vehicle that grows and can be used as collateral for a loan or withdrawn.
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. Your cash value account will likely have a cap for interest and returns, information which can be found in your policy documents.
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
The median cost of a funeral in the United States is $7,640. 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 to consider is final expenses or burial insurance. Final expense life insurance usually has low coverage limits capped at around $25,000, so it’s not the best option for income replacement. Additionally, the premiums tend to be very expensive because a medical exam is not required and the insurance company assumes more risk.
Final expense insurance can be a good choice for older adults whose primary goal is to prevent their beneficiaries from facing financial challenges associated with their death. It may also be suitable for people with pre-existing health conditions, or those who have been denied standard life insurance in the past.