What Happens when your Term Life Insurance Policy Ends?
A term life insurance policy, as the name implies, lasts for a specified period of time – the term of the policy. If you purchase a 10-year term policy, your beneficiaries would receive the death benefit if you were to die within the 10-year term of that policy. The same would be true of a 20 or 30 year term policy, in which case the death benefit would be paid if you were to die during the 20 or 30 year terms of those policies.
So, what happens at the end the term, you ask? The insurance company actually gives you the option of renewing that policy on an annual basis, but the costs are typically prohibitive and the premiums go up every year. I get (often frantic) calls daily from people who have recently received renewal notices at the end of their policies’ term periods, in total disbelief at how much the premium is going up. That is certainly an option, but we advise against doing this in most cases. Provided one is still in relatively good health, it’s much cheaper to purchase a new term policy when your current one is ending, than it would be to take the insurance company’s offer of renewing the policy annually.
Another option offered in most policies is the conversion option. With this option, you can convert your term policy into a permanent policy (universal life or whole life) within the conversion period. The conversion period varies with the length of the policy and your age. However, most policies allow you to convert until the end of the term. The benefit of this option is that it allows you to convert to a permanent policy at the same health class you were assigned for your term policy. This is great for those whose health has declined since purchasing their term policy and have a need for lifetime coverage.
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).
Feel free to play around with our quote engine and take a look at some of the scenarios I described above and see how it plays out for you. If you would rather discuss quotes with a live person, feel free to give us a call anytime.
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