Term life insurance is a legal contract in which the insurer promises to cover your life for a specific number of years in exchange of premiums. If you pass away within this period, your beneficiary will receive the payout. But what if you outlive the policy, or still need coverage even as the term life expiry date is approaching?
There are several ways to maintain term life insurance policy past the current policy’s expiry date. The most obvious one is by renewing the current policy, but that does not automatically mean it is the best option. You may want to consider buying a new policy instead, especially if you are healthy.
Other options include converting your term plan into a permanent policy or buying a small final-expense policy. If you have no dependents or debts, you may be able to afford to go without term life insurance all together.
Read on to learn more about your options so that you can make an informed decision before your current policy expires.
What Happens When It Ends?
As the term life policy that you bought years back approaches its maturity date, you might be wondering what to do. After all, term life insurance needs are not set in stone for life. Like much else, they change over time.
So, what kind of protection would work best for your family now? Can you renew your existing coverage — and should you?
We will walk you through the various options so that you can make an informed decision.
Purchase a new term life policy
If your life term insurance needs have changed considerably since you bought the current plan, you may be better off buying a new policy. Have you had more kids? Have you taken out a business loan for a startup? Purchased a vacation home? You may need more protection now than what your current policy provides.
The opposite also applies. Have you paid off much of your mortgage? Are your kids already in college? Do you only have a few years left before retirement? If you do not need as much coverage as before, look for a new policy that matches your present needs.
A new policy may also make sense for someone in good health. Most term life insurance policies include the guaranteed renewability feature. It allows you to renew coverage without a medical exam, as long as you are below a certain age. All the same, remember that renewal rates can be prohibitively expensive, even for healthy people.
Since a renewal does not involve any medical underwriting, the life insurer assumes your health has deteriorated and prices your renewal as if you are a high-risk new applicant in poor health. If you are in good shape, opting for a new, fully underwritten policy is a better option. While a term life insurance medical exam might be an inconvenience, it is worth the effort because insurers reward healthy applicants with lower rates.
Renew the existing term life policy
A life-shortening medical condition can make it impossible to get a new term policy that provides a sizeable death benefit. If you find yourself in such a situation, extending the current policy could be the easiest way to secure your family’s financial future, assuming that your policy comes with the guaranteed renewability feature. While the renewal premium will be substantially higher than what you are currently paying, renewing the existing policy could be your only option to have a sizeable life insurance payout.
Convert it into a permanent policy
Though permanent life insurance is not the best option for most people because it is so costly — sometimes as much as 10 times the cost of term life insurance — there are situations in which it could make sense. If you have a lifelong dependent, think about using the guaranteed conversion option, if available. The same is recommended for people who have a chronic, but not necessarily life-threatening, medical condition and would like lifelong coverage. For someone in such a situation, converting their term plan into a permanent one might be the only way to get lifelong protection. For example, if you have coronary artery disease and have had a stent insertion, you can well live a full and active life. At the same time, you might find it extremely difficult to get another traditional life insurance policy.
Switching to a permanent policy might also be a smart option for high net-worth individuals who have maxed out traditional investment vehicles. As permanent life insurance builds cash value over time on a tax-deferred basis, it can be a good investment tool in certain cases. The cash value is for you to spend during your lifetime, and you can tap into it any time you want by borrowing against or withdrawing from it.
Lastly, high net-worth individuals who want to preserve the value of their estate may also want to consider making a permanent policy part of their estate plan. Unlike a term plan, the former pays the death benefit regardless of when you die. Since the payout is not taxable, it can be used to offset estate taxes and ensure your heirs inherit the exact amount of money you wanted them to receive.
Buy a final expense life insurance policy
The average funeral can cost more than $7,000, and that is without including the end-of-life medical care. If you do not want to shoulder your family with these costs, consider putting a final expense life insurance policy in place. Usually, these policies do not require a medical exam, so you can get one even if you are in less-than-perfect health.
Go without life insurance
If your life has worked out exactly as you planned and you are now free of entanglements — no mortgage, no debts, and financially-independent kids — letting your existing coverage end without renewing it or buying another term life insurance policy might be a good idea.
How much coverage do I need when my policy expires?
There are a number of reasons why a person might need term life insurance past their policy’s expiration date. If you still have people in your life who depend on you financially, you may want to consider extending your coverage in some way. The same may hold true if you still have a mortgage or other debts.
If you decide you will need protection after your term life insurance policy’s end date, speak with an independent broker or advisor well in advance, at least six months before the expiry date. Any later and you might not have enough time to explore all available options and pick the one that is best for your current situation.
Do I Cancel My Policy Before It Expires?
You can cancel a term life insurance policy any time — but should you? That depends on your situation. When you purchase a 15-year or 20-year term plan, a lot can change during that time. If there is nothing in your life that you really need to cover, you probably do not require coverage.
Some of the common reasons for canceling term life insurance before the expiry date include:
- Your dependents have become financially independent
- You no longer have a mortgage or any other debt
- Your spouse, who was listed as the sole beneficiary, has died or you have divorced
- You now have enough funds to allow your spouse and children to live comfortably even if you are no longer around to take care of them
- Your new employer is offering a sizeable group life insurance policy
You can cancel your term life insurance policy by stopping payments. Because a term life insurance policy does not have cash value which the insurer can use to pay off premiums, it will lapse immediately. Other ways to cancel the term life insurance policy are by providing written notice to the provider or by calling them.
Term life insurance policies come with an expiry date, but there are many reasons why a person may need coverage past this date. If you find yourself in such a situation and are in good health, buying a new term life insurance policy might be your best option. This way you can buy coverage suitable to your current needs at an affordable price. Other options include renewing the current term policy at a higher premium rate or converting it into a permanent policy.