If you are like most people who purchase life insurance, you likely chose to purchase term life insurance over a permanent policy such as a whole life policy or universal life policy. There are distinct differences between term life insurance and permanent life insurance and reasons to purchase each. If you have a term policy, there will come a time that it will “expire” and decisions must be made.
Does a Term Policy Ever Expire?
Technically… yes. But it probably doesn’t expire (meaning that you have no option to remain covered) until much later than you may think. Many term life policies will allow you to remain covered if you so choose until around age 95 or 99. When you find out that your term policy is “expiring”, what is really happening is that the level premium payments are expiring.
At the time you purchase(d) your term policy, you entered into a contract with the insurance company to have level premiums for a period of time, usually somewhere between 10 and 30 years. If this is the case, you can continue to keep your policy until the real expiration date, which, again, is likely to be at age 95 or 99 in many cases.
Is Keeping My Existing Policy My Best Option?
Usually… no. Let’s say you purchased a 20-year term at age 35 with $500,000 in death benefit. At the time, you had a couple of young kids and a mortgage that you were still working on paying back. Now, you are 55. The kids are just about outdone with college and the mortgage will be paid off in 1 year. Your original reasons for purchasing the policy are all but gone. But your income has increased. You realize that if something were to happen to you now, your spouse’s lifestyle would still be significantly negatively impacted if your income were to go away. Continuing to have life insurance coverage still makes sense, only for different reasons.
So, you call your agent and let them know that you’d like to keep the policy. The response you get isn’t what you were hoping for. Yes, you can continue to pay on the policy and the insurance company will keep the $500,000 death benefit in place. But instead of the $600/year, you were paying for the last 20 years, the premium will be $1,500 for this year. And next year it will be $2,100. And it keeps going up.
After the level period of premiums expires, your policy is annually renewable. This means that you will be paying as you go- based on your age, which is constantly increasing.
So What Are My Options?
Option 1- Keep paying the annually renewable term. In most cases, this isn’t the best thing to do for the reasons described above. However, if someone has developed health issues that will likely mean that they will pass away in a short amount of time, this option could be the best.
Option 2- Apply for a new term policy. If you are still relatively healthy, a new term policy may be an option. A new application will require full underwriting procedures to be completed. The older the applicant, the more thorough the underwriting usually will be. But most companies offer term insurance for clients into their 70s. The pricing on a new term policy will likely be less expensive than keeping an existing policy that has become annually renewable.
Option 3- Convert part or all of your term policy to a permanent policy. Most term policies come with what is called a conversion privilege. At any time up to a certain age, the policyholder has the right to convert part or all of the death benefit to a whole life or universal life contract. If a policyholder exercises this privilege, they are not subject to any new underwriting or medical examinations- it is a condition of the original contract and is simply a matter of completing paperwork. If this conversion is completed, the policyholder will be treated with the same health class that they got at the time they purchased the original term policy, but it will be priced based on their age at the time of conversion.
Thus, an “expiring” term life insurance policy often affords the policyholder some options to keep their coverage in the event the death benefit is still needed, but a new policy may not be affordable or even possible.
– Matthew Tavani, Regional Sales Director at Gannon Associates