This is a question we are asked quite often, typically when we are doing annual policy reviews with our clients.
The answer isn’t so straight forward. You can’t “extend” the length of your policy, but there are a few great alternatives.
When discussing a new term life insurance policy with a client, especially when they have received life insurance quotes on our website, we always show the premiums for various term lengths, from 10 to 30 years.
In most cases, unless there is a specific need for a short term period (e.g. 10 years to cover a short term loan), we will recommend the longest term available (30 years for most age groups).
We realize there are budgetary concerns, but we will show a client that it will usually be less expensive in the long run to go with a longer term.
Additionally, the rates can be significantly higher after a shorter term if the client’s health class changes due to deteriorated health.
My advice now is, as it has always been, if you are purchasing term life insurance, purchase a policy with the longest term available for your age.
“Losing” Your Term Life Insurance
Technically you don’t get “kicked out” of your policy. You can keep paying premiums after your term period, but the rates will have gone up significantly.
Insurance agents with your best interest in mind, will usually keep you away from having to do things that way.
This is one of the reasons that we always recommend a longer term if there’s no foreseeable reason that we’d want our policy to end.
This is important because you lock in the rates when you’re younger. Trust me, it’s much cheaper to get a 30 year term life insurance policy when you’re 31 than it is to get a 10 year term policy at 61.
Hindsight’s 20/20. I have a short-term policy – now what?
So you’re reaching the end of your life insurance policy’s term and just want to know your options.
The most obvious option is simply buying a new term life insurance policy. Of course you’ll need to re-apply and go through the process all over again (one of the downsides to this route) but it will almost always be a cheaper option than paying the premiums on your current policy after your term has run out.
Like I mentioned earlier, your premiums won’t be as friendly as they could be, but almost always the best option.
Can You Convert Your Policy?
One great thing about the evolution of the life insurance industry has been the ability to convert your term life insurance policy to a permanent life insurance policy to protect you from this exact scenario.
Not all policies include these type of options, and many have guidelines about “when” you can do these conversions.
It is important that you fully understand your policy.
What do I mean when I say that the timing of your term life insurance conversion is important?
Not all policies are created equal.
Some companies only allow conversions of your term life insurance policy on a Period basis.
This means that you have a specified window in which you can convert your policy to a permanent life insurance policy.
Typically these periods are within the first 5 years after the policy has been issued.
Another common limitation is “Specific Age” convertibility.
This means that you can convert your policy as long as you’re still younger than the specified age of your policy.
It is not always the same, but a good guideline is to use 70 as the specified age.
Many term life insurance policies don’t have any of these limitations and they will let you convert to a permanent life insurance policy at any point in your term.
Can I get my money back at the end of my term life insurance?
This seems like an obvious “no.” Why would an insurance company take the risk of paying out a death benefit for a monthly premium as collateral, and then return your premiums if you outlive the policy?
There is actually 2 ways to get money back from your life insurance policy.
The first one is through the use of a Return of Premium Rider.
The first caveat to using this is, you will not receive your ENTIRE amount of paid premiums if you cancel prior to the end of the term.
The other downside to owning this rider is that you will pay much higher premiums over the course of your policy for the privilege to get back the premiums youpaid.
So, this all comes down to a trade-off that you have to decide which is right for you.
Most people choose term life insurance as the least-expensive option for protecting their family and income.
If you add this return of premium rider, it is no longer the least-expensive option.
The short answer to the question of “Do you get your money back at the end of a term life insurance policy,” however, is “no.”
Unless you have a return of premium rider, or you convert your policy into a permanent policy, if you outlive your policy, you will not receive any compensation.
Selling Your Policy
I did mention that there were two ways to receive compensation for/from your term life insurance policy and the first was through return of premium rider.
The second option is actually to sell your term life insurance policy.
This is also called a viatical settlement.
This is an extremely situational-based decision but, for a select group, this option may actually make a lot of sense.
There are a lot of downsides to doing this, especially if you’re trying to sell a policy towards the end of its term.
A policy’s value is directly related to how much time is left in the term (term life insurance) or how much cash value has been built up (permanent life insurance).
Renewable Term Life Insurance
Okay there is one other option.
It’s called renewable term life insurance.
Technically speaking, this is your only option to actually “extend” your term life insurance policy.
This is something that has to be in place when you buy the policy though, not something that can be just added on because you see your term is running out and would that option.
This isn’t usually the most financially sound out of all the options.
Usually, just buying a new term life insurance policy will be more cost efficient.
But, the renewable term life insurance policy definitely has its place as a last resort.
It should be thought of exclusively in that way.
This option is really only helpful to those that have suffered some significant change in health.
With the renewable term life insurance policy, you lock in your insurability, which for people in poor health would be the cheaper option, because, A, they would never get approved for a new policy or, B, if they did get approved, the premium would be prohibitive due to poor health-class rating.
Purchasing a 30-year term policy vs. purchasing a 10-year term policy every 10 years
We always recommend purchasing the longest term policy that fits your budget, unless you have a shorter need for specific purposes (e.g. key person insurance). By doing this, you will lock in your current health class until the end of the term, rather than purchasing a new policy more frequently, risking higher premiums due to negative changes in your health.
There isn’t a great difference in price if you purchase a 30-year policy or renew a 10 year policy twice (it varies based on age and health class), provided your health doesn’t change. I ran some quotes for a 35-year old male for a $500,000 term policy. I quoted both a 30-year term and a 10-year term, renewed twice. For a male in the best health class, purchasing a 10-year term policy every 10 years (to age 65) was actually a bit less expensive over the thirty years than the 30 year term (about a $600 difference over the 30 years). When I ran the same numbers for the Preferred Health Class, the 30-year option was approximately $2,000 less than the 10-year option. Again, it depends on one’s age and health class when the policy is purchased.
However, who can predict what their health will be in 10, 20 or 30 years? Will a healthy 35-year old male be in the same health at age 55, when the last of the three 10-year policies needs to be purchased? Most of us have changes in health as we get older, so by locking in rates at a younger age takes the risk out of the equation (it actually transfers the risk from you to the insurance company).
Best Option For An Expiring Term Life Insurance Policy
Life insurance is extremely situational, and that’s why the flexibility and customization of policies is so attractive to buyers.
That’s also why, there’s not a best course of action for every person.
We’ll do our best to summarize each option and who they work best for and who should avoid what.
1. Buying a New Term Life Insurance Policy
This, in a general sense, will be the best option for most people. Usually those that buy term, don’t want to own permanent life insurance.
They understand the risk and reward, and feel more comfortable paying the lower premiums of term life insurance.
If your health hasn’t significantly decreased, you can still, more than likely, get a good price on a term policy, and regain that peace of mind you had that your family will be protected.
2. Convert Your Term Life Insurance To Permanent Life Insurance
This is another solid option. I would recommend this choice for those that may have either had this in mind all along, or just wanted to take advantage of the relatively-inexpensive rates of term life insurance for a while, but understand the need for a permanent option.
Like we mentioned before, this isn’t always allowed. It will come down to the type of policy you have, what company you purchased your policy through, and other factors.
3. Buy a New Permanent Life Insurance Policy
This isn’t ideal, because if you wanted to purchase a permanent life insurance policy, it would have been better to secure the less-expensive premiums you would have been offered when you were approved for your term policy. Underwriters prefer younger and healthier people, prejudice or not.
While not ideal, it does accomplish the main goal for those looking for permanent life insurance that don’t have a policy where they can convert their term coverage.
4. Sell your Policy
Selling your Term Life insurance policy near the end of its term is probably the worst choice. Usually those people or institutions that buy life insurance contracts prefer permanent life insurance that has built up some sort of cash value. This considerably decreases the value of an end of the term, term life insurance policy.
All 4 of these options are considerably better than your other option, being uninsured!
If you are nearing the end of your term life insurance contract, it is important to understand all of these options, and next steps that you’ll need to take. Make sure you fully understand the options in your current policy and if you have a convertible option in it.
Whether you choose to renew your term policy, purchase another or get a refund, make sure you keep your family’s financial security in mind. For a life insurance quote, please browse our website to see which options would work best for you and your loved ones.