What happens if you outlive your term life insurance?
Term life insurance provides coverage for a specific period, typically ranging from 10 to 30 years. Unlike permanent life insurance, which is designed to offer lifelong protection, term life insurance ends once the term expires. However, there are options to extend coverage through policy renewals or conversions, which can be critical in maintaining continuous protection without the need to purchase a new policy. Understanding what happens if you outlive your term life insurance is essential for planning your financial future. At Bankrate, we leverage our extensive expertise in the insurance industry to guide you through your options and help you make informed decisions about your coverage.
What happens when term life insurance expires?
When term life insurance expires, you might find that you still need coverage for various reasons. While it’s common to purchase term coverage with the expectation that your financial responsibilities will decrease over time, circumstances like ongoing debts, dependents still needing support or new financial obligations may prompt you to extend your coverage.
If a term policy expires, it typically ends without any action needed from the policyholder. The insurance carrier sends a notice, premiums stop and there is no longer a death benefit. If the policy included a return-of-premium feature, the policyholder would receive a check for the premiums paid during the term.
Additionally, some term policies offer the option to renew on a year-by-year basis after the initial term expires. Renewal maintains the original coverage amount but is typically more expensive each year due to age-related risk increases. This option is particularly useful for those who develop health issues that make obtaining new insurance challenging.
If life finds you needing permanent coverage after all, many term policies include a conversion rider. This allows you to change your term policy into a permanent policy without needing to go through underwriting again. Conversion riders have an expiration date, however. Not all policies let you convert up until the end of the term.
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Whole life insurance combines life insurance with an investment component.
- Coverage for life
- Tax-deferred savings benefit if premiums are paid
- 3 variations of permanent insurance: whole life, universal life and variable life include investment component
Term life insurance is precisely what the name implies: an insurance policy that is good for a specific term of time.
- Fixed premium over term
- No savings benefits
- Outliving policy or policy cancellation results in no money back
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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 far in advance of the term’s termination date. That way, you’ll have time to take advantage of your policy’s conversion rider if it’s offered and makes sense for your circumstances. It is important to note here that you typically cannot add a conversion rider once the policy is in force. It’s either included from the start or not, depending on the insurer.
Term conversion
As mentioned previously, many term policies include a term conversion rider, allowing you to convert your term policy into a permanent one without a medical exam. The timeframe for this conversion varies by policy. Some policies only allow conversion within a specific period, such as the first few years, while others permit conversion until the end of the term. For instance, a 20-year term policy might limit conversion to the first 15 years. These conversion limitations typically apply if you want to convert without providing evidence of insurability. If you wish to convert outside the specified period, you will usually need to go through medical underwriting.
Term conversion is a strategic choice for those who develop a health condition or become otherwise uninsurable but still need life insurance after their term policy ends. Instead of applying for a new policy, which could be more expensive due to health changes, converting an existing term policy can be a cost-effective option. Conversion rates are based on the original risk class awarded when the policy was first taken out, typically without requiring a new medical exam.
However, permanent life insurance is inherently more expensive, and premiums will rise with conversion due to increased age. Many insurers offer partial conversions to make this transition more affordable. For example, converting a $500,000 term policy entirely might significantly increase premiums, so you might opt to convert $250,000 instead, balancing the need for permanent coverage with manageable payments.
Understanding your policy’s conversion options and any conversion deadlines at the time of purchase can help you plan more effectively and hopefully streamline your continuous coverage for you and your loved ones.
Renew your term coverage
Most term life insurance policies offer the option to renew for a limited number of years without requiring evidence of insurability. This means you can extend your coverage even if your health has changed. For instance, a 10-year term policy may be renewable each year for up to 10 additional years. During each renewal, your premium will increase based on your current age.
Although premiums for renewed policies typically significantly increase each year, this renewability option is especially beneficial if you develop serious health issues, as it ensures continued financial protection for your family without needing a new medical exam. The increase in premiums due to age at renewal is usually less significant than the potential increase or inability to secure a new policy if you were to reapply after being diagnosed with a serious health condition. This makes the renewability feature a valuable safeguard against the uncertainties of future health issues.
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 without a term conversion rider is to purchase a permanent life insurance policy after the term policy expires. Permanent life insurance policies, such as whole life insurance, are more expensive than term life insurance — sometimes up to ten times more costly. However, the cost can vary based on personal factors and policy choices. Overlooking cost for a second, here are some benefits of permanent life insurance:
- Lifetime coverage: Permanent policies provide coverage for the policyholder’s entire life, as long as premiums are paid. However, lifetime in this context typically falls between the ages of 95 and 121, the maximum coverage age range insurers typically set.
- Cash value component: These policies include a tax-deferred cash value component, which grows over time. The cash value can be used as collateral for a loan or withdrawn.
- Safe investment: While the cash value component may not earn as much interest as some other investments like the stock market, it is generally considered safe and can be an important part of financial planning — but typically should not be your primary means of saving for retirement. Life insurance is insurance, not an investment product.
There are also several different types of permanent life insurance, each with unique features. Here are the common products you will come across:
- Whole life insurance: Offers fixed premiums, a guaranteed death benefit and a cash value component that grows at a guaranteed rate.
- Universal life insurance: Provides flexible premiums and death benefits, with a cash value component that earns interest based on current market rates or a fixed rate.
- Indexed universal life insurance: Similar to universal life but with a cash value component tied to a stock market index, providing potential for higher returns.
- Variable universal life insurance: Combines the flexible features of universal life insurance with investment options for the cash value component, allowing policyholders to invest in various sub-accounts.
Although permanent policies are not recommended for everyone due to their higher cost, they can be beneficial in certain situations. For example, they may be ideal for individuals with a child with a disability who will never be financially independent or a non-working partner who would need financial support if the primary earner dies.
Final expense insurance
The median cost of a funeral in the United States is $7,848. 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 often has low coverage limits capped at $10,000 or $25,000, so it’s not the best option for income replacement. Additionally, the premiums tend to be comparatively expensive because a medical exam is not required and the insurance company assumes more risk. As with similar forms of insurance, cost will go up for more coverage and will also rise with the policyholder’s age.
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.
Do I still need life insurance?
As your term life insurance policy nears its expiration, it can be helpful to evaluate whether you still need life insurance coverage. Your need for continued coverage will depend on various personal and financial factors.
If your term coverage is ending, you may still need life insurance if you have:
- Dependents still relying on your income: If you still have dependents who rely on your income for their living expenses, education or other needs, maintaining life insurance coverage can help provide financial security for them.
- Outstanding debts: If you have significant debts, such as a mortgage, car loans or other financial obligations, life insurance can help make sure these debts are paid off without burdening your loved ones.
- Business obligations: If you own a business, life insurance can help with business succession planning, covering key persons or repaying business loans in the event of your death.
- Significant wealth: Life insurance can be a tool for estate planning, providing liquidity to pay estate taxes or leave a financial legacy for heirs.
- Special needs dependents: If you have a dependent with special needs who will require lifelong financial support, life insurance can ensure their needs are met even after you are gone.
On the other hand, you might not need life insurance in these scenarios:
- Financial independence of dependents: If your children or other dependents are financially independent, you may no longer have a need for life insurance coverage.
- Paid-off debts: If you have paid off your major debts and have sufficient savings or other assets to cover any remaining obligations, continuing life insurance might be unnecessary.
- Retirement savings: If you have adequate retirement savings and other investments to cover your and your spouse’s living expenses, you may not need additional life insurance coverage.
- Spouse’s financial stability: If your spouse or partner is financially secure and capable of maintaining their lifestyle without your income, the need for life insurance may be reduced.
Assessing your current financial situation and future needs is critical in determining whether to maintain or purchase new life insurance coverage. Consider consulting with a financial advisor or licensed insurance professional to help you make an informed decision based on your specific circumstances and financial goals.
Frequently asked questions
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The best life insurance company for you will be a personal decision, based on your unique characteristics and coverage needs. Speaking with an independent insurance agent can be a good first step toward identifying the best life insurance companies to fit your budget, health and overall situation.
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Choosing between term and permanent life insurance can be challenging. Each type has its own benefits, and the right choice often depends on your individual needs and financial situation.
- Term life insurance: Term policies are generally more affordable, especially when you are young. In terms of how long term life insurance is, policies typically offer coverage for a specific period, such as 10, 20 or 30 years. This makes them a good option for people who need coverage for a limited time, like until their children graduate from college or their mortgage is paid off. However, term policies do not build cash value, and coverage ends when the term expires.
- Permanent life insurance: Permanent policies, including whole life and universal life, offer lifelong coverage as long as premiums are paid. These policies also include a cash value component, which grows over time and can be used as collateral for loans or withdrawn, though withdrawals may reduce the death benefit. Permanent life insurance is generally more expensive than term life insurance but provides both insurance protection and a financial asset.
When deciding between term and permanent life insurance, consider your long-term financial goals, your budget and whether you want coverage for a specific period or for your entire life.
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Even if you do not have dependents, you still may want to consider a life insurance policy. Many people choose to purchase a policy with their spouse as the beneficiary to assist that person with the burden of end-of-life costs. You may also choose to leave your policy’s death benefit to a nonprofit organization, educational institution or business you care about.
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Yes, you can cancel a life insurance policy at any time. If you have a term policy, you can either formally cancel with your insurance company, or you can simply stop paying the premiums. With permanent life insurance, however, the cancellation process can be more complicated. You typically have to start the cancellation process by notifying your insurance company. Depending on how long the policy has been in force, you might be required to pay a surrender fee. In most cases, you are allowed to keep the cash value when you cancel a permanent life insurance policy, but the cancellation fees will be subtracted from your final payout. Check your specific policy or speak with your insurance agent to learn more about the process and any potential penalties for canceling.
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