What is Term Life Insurance?
This type of life insurance is common and fairly easy to understand. It is life insurance that pays out if you die during a specific period of time (the “term”). Your beneficiary will receive the entire death benefit (the lump sum paid to your beneficiaries upon your death) no matter when during the term you die, and your monthly payments will never go up. Most term life insurance policies are in increments of 10 years, 20 years, or 30 years. But the length of the term is often more flexible than that. Sometimes you can purchase it in increments of 5 years. It’s really up to you.
Term life insurance has level “premiums.” This means the premium payments will not go up over time, no matter how long you have had the policy. So if you are paying $20 per month for your life insurance policy, the payment will be $20 on the very first month you own the policy and will still be $20 per month on the last month you own your policy.
Also, with term insurance, the death benefit is one set amount and doesn’t change. So, for example, if you bought a 20-year term life insurance policy and died within a few months of purchasing it, your beneficiary would get the full death benefit, let’s say $500,000. And say with this same policy, you did not die until you had the policy for 19 years, your beneficiary would still get the full $500,000. No matter how long you have had your policy, as long as you are still within the “term,” your beneficiaries will get paid the full death benefit.
What Happens When the Term Ends?
The need for life insurance rarely ends, so what do you do when the term of your policy is up?
If you own a term life insurance policy, and it is getting ready to expire, you have one thing to be thankful for — you are still alive! However, now you need to decide what to do about your life insurance.
Purchase Another Life Insurance Policy
On the downside, your premiums will likely rise because health and age are key factors for determining the amount of your life insurance premium. Unsurprisingly, you will pay higher premiums the older you are when you start a new policy.
If you are in good health with a good family health history – and maintain a healthy lifestyle – you may still get a reasonable rate. In the worst case scenario, if you are in bad health, your premiums may end up being so expensive that you are unable to renew your insurance. Even worse, you may be at risk of not re-qualifying.
One way to avoid this issue is to purchase a permanent life insurance policy instead of a term policy to start with.
Convert to a Permanent Life Insurance Policy
Another solution is switching your plan from a term life insurance policy to a permanent life insurance policy. Many term insurance policies offer an option to “convert” when the term ends.
Before the “term” of your term life insurance policy ends, consult a licensed insurance professional. You may have the ability to extend your current policy or even convert it to a permanent life insurance policy.
Whatever you do, don’t stop making payments or just let the term end without taking action. You may have more options than you know – options that are better than starting over with a brand new policy or going without life insurance.
Renew Your Current Term Policy
Renewing your current term life insurance policy may be an option for you. Some term policies give you the option to renew, often called a “renewal option” or “renewal privileged.” Renewing may or may not end up in higher premiums because sometimes you can renew your policy without a new medical exam, avoiding the underwriting process. Not all policies are able to be renewed.
Choosing to make your original term life policy have the renewal option may end up in paying higher premiums overall, and if you do decide to renew, even though you most likely won’t need to take a new medical exam, your monthly premiums might go up.
Having the option to review your term policy is often a good choice if you want a lower payment to start with because of immediate needs, such as a mortgage payment, and you want the option of continuing your insurance in the future and think you may be able to afford a higher premium in the future, when your career is more established.
If you do have the option to renew, you are not obligated to. When your term policy ends, you can just choose a previous suggestion: let it lapse and apply for a new policy (not recommended) or convert to a permanent policy.
Term Vs. Perm
Life insurance involves an agreement between you and an insurance company. You agree to make premium payments to the insurance company, and in the event of your death, the insurance company pays a lump-sum amount to your designated beneficiary. The amount of premium you pay is based on certain criteria such as your age, health, past illnesses or diseases, and lifestyle.
Why not Both?
More Thoughts to Consider
Getting a Refund of Your Premiums
Investing the Difference
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This information is provided for general consumer educational purposes and is not intended to provide legal, tax or investment advice.