What Happens When Term Life Insurance Expires
Everything you need to know about term life insurance and what to do when it expires.
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When you outlive your term life insurance policy the coverage that you had will no longer exist.
However, this means that you will have the option to convert to a permanent policy or buy new term insurance.
This article will help you understand more about term life insurance, what happens when it expires, what options you have when it does, and how to buy a new policy.
What Is Term Life Insurance?
Term life insurance policies are contracts between policyholders and insurance companies that cover them financially in the event of death.
Policyholders pay a monthly premium to the insurance company, and when the policyholder dies, the insurance company pays out a death benefit.
Term life insurance only covers you for a specific period of time. The word "term" simply refers to a period of time.
If you pick term life insurance, you will be covered for a set number of years, as indicated in the policy.
Your contract with the insurance company will expire when a coverage period expires, and you will then need to purchase a new life insurance policy.
Depending on your insurer, the period of your insurance coverage will differ. You might be able to get a term life insurance policy for any length of time you like.
However, here are some of the typical lengths of coverage that people can choose from with a term life insurance plan:
Year by year.
10 years.
15 years.
20 years.
30 years.
Terms You Should Know:
Premiums: These are monthly or annual amounts that policyholders pay to keep their coverage.
Death benefit: This is the amount paid to the beneficiary of an insurance policy after the policyholder’s death.
Beneficiary: A person who receives the death benefit (payout) from a life insurance policy in the event of the policyholder’s death.
Cash value: This is the portion of your policy that earns interest and may be available for you to withdraw or borrow against in case of an emergency.
Source: Pexels
What Do You Do If Your Term Life Insurance Is Expiring?
Your ability to support your dependents after your policy expires will determine whether you need life insurance after it expires.
Recalculate your coverage needs as your current policy's expiration date approaches if you:
Still have loved ones or family who rely on your financial support.
Don’t have enough savings to cover end-of-life expenses.
Are still paying off large debts, like a mortgage.
If you're nearing the end of your policy's term and think you'll need more coverage, start considering other coverage options at least six months ahead of time to guarantee you don't end up with a coverage gap that leaves your family without financial support.
What Is a Coverage Gap?
When you don't have enough, or any, life insurance coverage, you have a coverage gap. If you die during a coverage gap, your dependents are unlikely to receive the financial assistance they need to replace your income, settle bills, and pay other expenses.
To provide a safety net for your family, you should purchase life insurance that covers all of your financial commitments and keep it active for as long as someone relies on you for support.
You'll need life insurance if you'll still have dependents or financial obligations following your policy's expiration date.
This scenario will then provide you with the opportunity to switch to a different policy type or coverage amount since your financial demands have most likely changed compared to when you first purchased the term life policy.
Source: Pexels
How Do You Renew a Term Life Policy?
Although you cannot officially renew your current term life insurance policy, you can convert it to a permanent policy or purchase a new term policy.
Applying for a new term policy rather than a term conversion may be the better alternative if your health is still good.
If you would like to ‘renew’ your term life policy, you will probably look for a lower death benefit and a shorter term when buying a new term policy. Compare quotes to determine the most inexpensive premiums for your needs.
Let's take a look at some of your options if you decide to buy a new life insurance policy when your old one expires.
Types of Term Life Insurance
When your term life insurance policy expires, you will typically have to buy a new insurance policy in order to get coverage.
There are many different options that you can choose from, including a permanent life insurance policy or various other types of term insurance.
By the time your policy expires, you should ideally no longer require life insurance. If you outlive your term and still need insurance, consider a term conversion or purchasing a new policy with a smaller coverage limit.
Here are some of the major insurance policies that you can consider buying when your term life insurance policy expires.
Do I Need Term Life Insurance?
If you are unsure about the benefits of various term life insurance policies, send your questions to Help@PolicyScout.com or call us at 1-888-912-2132 to get personalized assistance from one of our skilled PolicyScout consultants.
Decreasing Term Life Insurance
Decreasing term life insurance follows a similar method to regular term life insurance, but it has a few key characteristics that make it more appealing if a policyholder needs to cover financial obligations that decrease as people go through life, such as a mortgage or college tuition.
The annual cost of decreasing term life insurance is fixed. In most cases, policies are less expensive than typical term life insurance.
When you buy a decreasing term policy, you can choose how long you want it to last. Most insurance providers offer policies with terms between one and 30 years.
For example, decreasing term life insurance might pay out $100,000 in the first year of a 30-year policy. The payout might drop to $98,000 in the second year. The coverage might pay out around $85,000 after ten years. The value continues to decline until the end of the final year, at which point it has zero payout value.
Renewable Term Life Insurance
These are one-year term life insurance plans that increase in price as people age. These plans’ costs rise each year, while the payout amounts stay the same.
A benefit of this type of term life plan is that policyholders don’t have to go through underwriting each year.
For example, a person may purchase a renewable term life insurance plan when they are 35, which will cost them around $500 annually.
If they would like to keep their life insurance for the next year when they are 36, their insurer will quote an adjusted price (for example, $510) to get the same coverage.
Convertible Term Life Insurance
These are term life insurance plans that offer policyholders the option of converting their policy to a permanent life insurance plan.
What Is Permanent Life Insurance?
Permanent life coverage is a life insurance policy that does not expire and stays in place for your entire life.
These life insurance contracts will only end if the policyholder stops paying their premiums or surrenders their policy.
Permanent life plans are usually more expensive than term life insurance plans. Still, they can offer some benefits that term life insurance does not offer.
You will only have to go through underwriting once when you sign up to permanent life insurance.
If you are younger and in good health, getting coverage is easier. However, if you are older or have a chronic medical condition, you may pay higher premiums for permanent life cover.
In some cases, this is an excellent option because your policy builds up a cash value over your coverage period.
What Is Underwriting?
Before a person is allowed to sign a life insurance contract, insurance companies conduct risk assessments that help them figure out the chances of a policyholder dying prematurely.
This process is known as underwriting and it involves an in-depth review of an applicant’s medical history, credit history, and even driving record.
If an applicant is untruthful about a medical condition or health issue at any point of the underwriting process, an insurer can cancel a policy or withhold the death benefit from their beneficiaries.
Source: Pexels
Whole Life Insurance
Whole life insurance, also known as traditional life insurance, are policies that have fixed premiums and guaranteed death benefits that do not change throughout a person’s lifetime.
For example, with a whole life insurance policy of $150,000 a person might be expected to pay $180 each month. The policyholder will have to continue paying this premium amount in order to keep their insurance coverage.
Even if the policyholder encounters financial difficulties, they will have to continue paying the unchanging premiums or change their death benefit amount to keep the insurance.
A savings or cash value component is also included in whole life insurance plans. This allows policyholders to accumulate cash in their policy that they can spend in a variety of ways.
A policyholder can build up a cash value for their coverage by paying extra money on top of their monthly premiums. They can invest, borrow, or spend this money.
If a term life insurance policyholder outlives their plan, a whole life insurance plan may be a good option to convert to if they are wanting insurance for the rest of their life.
However, this option is often more expensive than a term life insurance policy and it is typically easier to purchase when the policyholder is young and healthy.
Universal Life Insurance
Universal life insurance is a type of permanent insurance that allows for more payment options, contract changes, and cash value benefits.
With a universal life insurance plan, policyholders can change the amount of their death benefit or the premium amount they pay each month.
For example, a person might purchase universal life coverage in their 30s while married.
If they get a divorce later on and realize they won’t need as much life coverage, they can contact their insurer and lower their death benefit.
This allows them to keep their life insurance coverage, as well as whatever cash value they have built over time. They can also lower their insurance payments and adjust their coverage to better suit their needs.
Universal life insurance also allows the policyholder to change their payment terms and, in some cases, even use their policy’s cash value to cover their premiums for certain periods.
Universal life insurance plans also have a cash value component. These plans offer similar benefits as term life insurance, such as lower premiums than whole life cover.
Source: Pexels
Converting a Term Life Insurance Policy to Whole Life Insurance
Most term life insurance contracts include a term conversion rider, which allows you to change your policy to a permanent policy once the term has expired.
What Is a Rider?
A rider is an optional coverage or feature you can add to your life insurance policy, often for an additional cost.
The main benefit of a term conversion is that it removes the need for additional underwriting. Even if your health has gotten worse, you'll avoid the medical exam and keep your previous insurance classification, saving you money on premiums.
Permanent insurance, however, is more expensive than term insurance. Your insurance provider may give you a term conversion credit to help you save money on your payments, but this usually only lasts for a year.
If you want to use the term conversion rider, you'll have to do so while your policy is still in effect. At the very least, it is advised to start the procedure in your final year of school.
If you would like to learn more about converting from term to whole life insurance, check out our article on how to do it.
What Is a Return of Premium Term Life Insurance Policy?
Term life insurance, unlike whole life insurance, does not have a cash value component that may be cashed out. You won't get a refund if you outlive your term life insurance policy unless you purchased a return of premium term life insurance policy (ROP), which often isn't recommended due to its high cost.
However, a return of premium life insurance policy is a plan that will refund the total value of premiums a policyholder has paid if they don’t die during the term of their coverage.
Adding a return of premium rider to a term life insurance policy will often cause the annual cost of coverage to increase. For example, a term life plan might cost $300 without a return of premium clause, but $500 with one included.
For most people, a return of premium life insurance policy isn't a good idea. Instead, for your family's financial security, consider purchasing a regular term life insurance policy and putting the money that you would have used for the ROP into traditional savings or investment accounts.
Source: Pexels
Do You Still Need Life Insurance after Your Term Policy Expires?
If your loved ones no longer require your financial assistance, you've paid off your obligations, and your assets are able to cover your retirement and end-of-life costs, you probably don't need life insurance.
If there will be no lasting financial consequences, you can simply let your policy lapse and your coverage will expire at the end of the term. Just remember that your family will receive no death benefit if you die the day after your policy expires.
If you’re worried about funeral costs when you die, a good option is to take out a final expense insurance plan. These plans are affordable, easy to get, and will remain in place until you die.
Where Can I Learn More about Life Insurance Options?
Term life insurance is often a good option for someone who isn’t prepared to commit to a permanent life insurance policy.
However, if you outlive the term, there may be some implications, such as having to decide whether to pick a new policy, either term or permanent.
If you are reaching the end of your term life insurance and have some questions about what to do next, send them to Help@PolicyScout.com or call us at 1-888-912-2132 to get personalized assistance with finding a plan.
We also have loads of articles to help you understand costs, enrollment options, different plans, and coverage for the various types of life insurance at PolicyScout’s life insurance hub.