A term life insurance policy can be a powerful, cost-effective tool for helping families meet their financial obligations following the death of a spouse or parent. But what happens when the term ends? This article talks about three options: Renew the existing policy, purchase a new term life policy and switch to permanent life insurance.
3 options if your term life insurance is expiring
A term life insurance policy can be a powerful, cost-effective tool for helping your family meet its financial obligations in the event something happens to you or your spouse. But what happens when the term ends? Here’s what you need to know to maintain peace of mind.
Coming to a crossroads
It’s common for young couples to buy 20-year (or longer) term life policies when their children are young or they’ve purchased a home. The idea is that, when a policy reaches the end of its term, children will be financially independent, the mortgage will be largely paid off and the policyholders will have accumulated enough savings.
But that doesn’t always turn out to be the case. Children may remain dependent on you well into their 20s, mortgage payments can continue indefinitely (especially if you’ve refinanced) and retirement savings may fall short of expectations.
Beyond the initial term
If you anticipate that you’ll need life insurance protection beyond your policy’s initial term, you can take one of several actions:
1. Renew the existing policy. This may be the best option if you have health problems, because many policies allow you to renew without being required to answer health-related questions or undergo a medical exam. However, depending on your age, premiums may increase, especially at the conclusion of a specified level term period.
2. Purchase a new term life policy. If you’re in reasonably good health, you may want to purchase a new term life insurance policy. Recent developments in the insurance industry have led to generally lower prices and innovative new products, such as policies that combine life insurance and long-term-care benefits. Some policies offer “living benefits,” which allow you to accelerate death benefits in the event of a terminal illness.
To obtain a new policy, you’ll need to answer health questions and submit to a medical exam. Premiums will likely be higher than those of your initial policy. But it may be possible to keep costs down by selecting a shorter term, such as five or 10 vs. 20 years. Another option: If you need coverage for only a few years and can afford sharp price increases, purchase a policy that’s renewable annually.
3. Switch to permanent life insurance. If your future financial obligations are uncertain, or you wish to use life insurance to provide a source of wealth for your children or other loved ones, consider permanent life insurance. Whole life, universal life and variable life policies are much more expensive than term life policies, but they provide a death benefit typically for the rest of your life. They also include an investment component that allows you to build cash value on a tax-advantaged basis. Many term life policies allow you to convert to permanent life insurance without a medical exam. And to hold costs down, you may be able to convert your term policy to a permanent policy with lower death benefits.
If you’re considering converting to permanent life insurance, review your term life policy as soon as possible. Most policies set a deadline for converting, which may be several years before the term expires.
Covering all the bases
What if you’re a young adult who wants to purchase life insurance but doesn’t want to have to extend coverage at high prices decades from now? Permanent life insurance would solve the problem, of course. But the premiums may not fit your current budget.
You might consider purchasing a term life policy with a longer term (such as 30 years). Or, you might buy a 20-year term policy with the largest death benefit you can afford, and then supplement it with a 30-year term policy with a smaller death benefit. Ask your insurance agent about this and other cost-effective strategies for protecting your family.