963. Laura answers a listener's question about what happens when a term life insurance policy expires.
963. Laura answers a listener's question about what happens when a term life insurance policy expires.
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Welcome back to Finance Friday, another special edition of Money Girl, where I answer your burning money questions! Today's topic comes from Jennifer, who says:
"My husband and I both purchased 20-year term life insurance policies when we were in our twenties, and now that we're in our forties, the policies will expire soon. Can you explain our options once we no longer have those policies?"
Jennifer, I appreciate your question! My husband and I recently faced a similar situation with our life policies expiring, so I can definitely help you consider all your options. This post will review tips on determining if you need life insurance and how to maintain or replace your existing coverage.
Welcome back to episode 963 of Money Girl–I appreciate you downloading the show! I'm Laura Adams, an award-winning author, on-camera spokesperson, female money speaker, and founder of The Money Stack, a Substack newsletter.
You can learn more, ask any money question, and sign up for the Money Stack at LauraDAdams.com. You can get the newsletter for free or become a paid member with access to my live educational and Q&A events. Additionally, you can ask a money question by leaving a voicemail at 302-364-0308.
What is term life insurance?
There are two main types of life insurance: permanent and term. Permanent insurance covers you for your entire life and typically builds a cash value that you can tap.
Term life insurance is the focus of this discussion. It only covers you for a set period or term, such as 10, 15, or 20 years. If you die during the term, while your policy is active, your beneficiaries receive a pre-determined death benefit, such as $100,000, $500,000, $1 million, or more.
The higher your death benefit and the longer your term, the higher your premiums will be. However, term coverage is more affordable than permanent life insurance. Other factors that determine your life insurance premiums include your age, gender, health, medical history, smoking status, and driving history.
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What happens when term life insurance expires?
Once your term life insurance expires and you stop paying premiums, your beneficiaries are no longer eligible for the policy benefit if you die. Plus, you don't get your premiums back; however, you're still alive, so congratulations!
You're not entitled to receive any money back for unused life insurance unless you purchased a specific type of coverage called a return of premium (ROP) policy. With an ROP life policy, you pay higher premiums for term coverage, but you get them refunded in full if you outlive the policy term.
How to know if you need life insurance
At least a year before your term life insurance expires, your insurer typically starts reminding you about the upcoming deadline. It's a good time to consider whether you need more coverage or want to let your current coverage expire.
With term insurance, you typically purchase it to have protection during a specific timeframe, such as until a child graduates from college or reaches adulthood. If you achieved that goal, then saying goodbye to a term life policy may be exactly what you planned.
However, if you have people in your life who are financially dependent on you, such as a partner, spouse, child, or parent, you likely still need life insurance. You can also utilize life insurance in your estate planning, such as providing heirs with a benefit to cover your final expenses. Life insurance can also be an excellent way to leave a legacy to your family or a special organization.
Regardless of your reason for seeking additional life coverage, we'll review several options for you to consider. Be aware that you don't have to wait until a term life policy expires to compare quotes or apply for additional coverage. You can always have multiple life insurance policies that add up to the total amount of coverage that's right for you.
RELATED: Creating a disaster-proof financial life
How to convert your term life insurance
Some insurers may offer you the option to convert a term life policy to a permanent policy. As I mentioned, it provides lifelong coverage and builds a cash value. When converting a policy, you typically don't have to undergo a medical exam. However, permanent policies are more expensive than term because they give you more benefits.
A good reason for converting a term policy to a permanent one is if your health has declined significantly since you originally purchased the policy. That would allow you to get covered at a rate based on your better health, not your current health, saving you money.
If you have dependents or outstanding financial obligations when your term life policy ends, converting it to a permanent policy ensures your loved ones are protected no matter when you die. That could be especially important if you have a special needs child or an aging parent who depends on you and would need financial security after your death. Additionally, you may find the benefits of a permanent policy, such as building cash value, attractive for retirement planning or other financial objectives.
But if you don't need lifelong coverage or want to pay much higher premiums for permanent life insurance, a term policy may be best. Many insurers allow you to convert a portion of your term policy into permanent coverage, which could help reduce your premiums and keep some amount of lifelong coverage.
Permanent life insurance can be complex, with numerous options and surrender fees if you cancel it prematurely. So, be sure to seek guidance from a financial professional who can help you weigh the pros and cons before buying permanent life insurance.
ALSO LISTEN: Term or permanent–which type of life insurance is right for you?
How to extend your term life insurance
A second option insurers often allow is to extend your current term life policy. However, your premium will be higher because you're older. As you can imagine, after paying a consistently low premium for 20 years, seeing it increase substantially can cause an unpleasant surprise.
For instance, let's say your premium for a 20-year, $500,000 term life policy was $100 per month, starting in your 30s. It could be $300 or $400 a month if you choose to extend a policy starting in your 50s.
However, the upside of extending an existing policy is that you won't have to go through underwriting or a medical exam. That could be critical if you need life insurance but may not be insurable due to a significant decline in your health. Plus, you may be able to
reduce the death benefit to make an extended policy more affordable.
How to shop for new term life insurance
A third option is to shop for a new term life policy when your existing coverage is set to expire or has expired. For instance, if your 20-year, $1 million policy expires, you may want to purchase coverage for 15 years with a $500,000 benefit.
You have the flexibility to choose the provider, amount, and term that suits your needs. It’s easy to shop online using a site like Policygenius where you can compare quotes and speak with a licensed insurance professional for guidance.
However, obtaining new life insurance typically requires a medical exam. While there are no-exam life insurance options, they usually cost more than a standard policy.
Additionally, as I mentioned, you'll pay higher premiums when you're older and applying for life insurance. You can always compare the cost of renewing a current life policy and getting a new one to see which option is better.
In my experience, getting a new term policy is more affordable than opting for an automatic renewal. But it depends on your desired benefit, age, and health situation. If you're still in relatively good health, applying for a brand new life policy may give you more for your money.
The bottom line is that if your term life insurance is expiring, don't assume that a new policy will be unaffordable because you're older. The premium is likely to be higher, but it may still be worthwhile if you have loved ones who would be financially hurt after you're gone.
If you're a young policyholder or plan to buy life insurance while you're in good health, remember that you can save money by locking in a fair rate sooner rather than later. Just remember your policy's expiration date so you have plenty of time to weigh all your insurance options. With a bit of planning, you can avoid significant life insurance rate hikes.
Only you and Jennifer can decide if you want or need to provide for dependents, business partners, charitable organizations, schools, or final expenses after you're gone. However, as I mentioned, if you no longer need life insurance when a policy expires, there's no need to purchase or extend coverage.
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That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
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