Term life insurance is not an artisanal cheese or a Cabernet Sauvignon: It will not “mature,” no matter how long you have it for. The idea that term life insurance matures is just one of the common misunderstandings regarding what happens at the end of your term.
Whether you’re in the researching phase of buying a policy or if you are coming to the end of your term length, you might find yourself wondering what happens when the term is up.
By definition, the term in term life insurance lasts for a specific period, usually 10, 15, 20 or 30 years. Typically, young families have a policy to protect them during the years when savings are low, and children are financially dependent. During that time, you can enjoy the peace of mind that comes with knowing your family has financial protection regardless of your net worth.
Once you’ve come to the end of your term length, you’re not out of options. Technically, most term life insurance policies don’t expire due to a guaranteed renewability feature, which enables
you to lock in your underwriting class and extend your coverage for short periods of time.
So, what should you do when your term length is up? Do you get any premium money back? Should you renew your coverage or shop for a new policy? Let’s weigh your options.
How a term life insurance policy works
Simply put, there are two broad outcomes when you buy term life insurance:
If you die during the term length of your term life insurance policy …
The value of your policy will be paid out to your beneficiaries – and that’s it. This cash payout is called the death benefit: It helps keep your loved ones financially secure, and it’s usually income tax-free.
If you live through the term length of your term life insurance policy …
The majority of people with term life insurance live beyond the term, which is good news for everybody. For one thing, it makes the price of term life insurance very affordable, and for another, still being alive is an important goal for most people.
What happens to the life insurance premiums you paid
Once the term is up on most types of term policies , you do not get back the premiums you’ve paid. That’s why level term life insurance is so affordable. Much like your auto, pet or renter’s insurance, you pay the premiums and hope you’ll never need to use it.
There are term policies out there called “return of premium” that may seem like an attractive option because you get back the premiums you’ve paid. However, these types of policies cost much more than your typical level term policy. Confusing? Yes, we agree. For example, a 35-year-old man can buy a 30-year, $500,000 Haven Term policy issued by MassMutual starting at about $41 per month. (That’s a medically underwritten, level-term policy.) A return of premium policy for the same man and the same amount of coverage would cost about $120 per month, according to State Farm.
Not only does this higher premium mean less money in your pocket each month, it’s also returned to you at no interest.Naysayers proclaim it’s extra money of yours that is given to an insurer to hold onto and invest for its own gains. Advocates say it’s better than nothing and can serve as forced savings.
We say: Buy the more affordable term life insurance coverage and use the difference to build an emergency fund or grow wealth.
Three options for an expiring term
What if your term ends and you want to be insured for longer? If your policy has guaranteed renewability, you can maintain your underwriting status and extend your coverage for short periods of time. You can usually renew the policy for one year, which gives you time to consider your options if you want coverage for longer. Be aware that those options will involve paying more than you used to. As you get older, life insurance premiums become significantly more expensive, which is one reason it’s important to purchase the right amount – and length – of coverage when you first get life insurance, so you can lock in a low rate while you’re young and healthy.
Ideally, you’ve chosen a long enough term length so that when your policy ends, you don’t need it anymore (your kids are grown, your mortgage is paid off), and you don’t have to purchase additional coverage at greater cost. To help figure out what that coverage amount should be, use the Haven Life Insurance calculator: It’s free, easy to use, and could help save you money in the long run.
If your life insurance term is expiring, consider these three options:
1. Letting the coverage end
If you’ve determined that you no longer need coverage, then congratulations! There are two reasons to celebrate. You’re living a long, full life, and you’re financially very healthy.
There’s no reason to feel guilty or worried if you’re not re-upping your term life insurance coverage. It’s meant to hold you over and help financially protect your family when there are little ones in the house and before you’ve spent years and years saving for retirement and the unexpected. (But, you can do a gut check on your life insurance needs here just in case.)
Enjoy the extra money in your bank account, and make sure that those little-turned-adult ones know how important coverage is when they have a young family of their own.
2. Renewing your current coverage
Typically, you can renew the policy for one year and then revisit your needs and renew again a year later under a guaranteed renewability provision. This can buy you some time so that you’re not without coverage while you look for a better option.
Extending your term policy comes at a cost, though. In fact, your premiums will be exponentially higher than the low rate you enjoyed during the policy’s original term. And, the price will increase each year you renew. When you renew a policy, insurers are assuming that you’re paying the heightened premiums because you can’t qualify for medically underwritten coverage — which could be true.
So why would anyone want to do this? For starters, because you can extend your coverage without going back through the underwriting process. If you’re not in great health or have suffered from a significant illness during the term length, renewing your policy may be the only option for maintaining the amount of coverage you currently have. But if you’re looking for a several year or lifelong solution, an extension isn’t the way to go.
Extending your policy might make sense if you:
- You’re in a situation where significant debts or financial dependents will be around for a short period (say a year or two).
- Are unhealthy or have chronic health issues that would prevent you from qualifying for medically underwritten or simplified issue coverage.
- Need to maintain a significant coverage amount such as $500,000 or more.
3. Buying a new policy
If you’ve determined you need to buy a new policy, the type of coverage you should purchase will depend on your coverage needs, your age, and your health.
Status: You’re healthy and/or want more than $100,000 in coverage
If you’re in your 40s, 50s or even early 60s, purchasing a new, medically underwritten policy is still a great option. You can buy more substantial coverage amounts and get more affordable rates than you can with simplified issue or guaranteed issue policies.
A good place to start is to first, ensure you really need coverage. We don’t want you paying for coverage you don’t need. Use an online life insurance calculator, which can look at your age, your debts and your financial dependents to recommend a policy amount.
Once you’ve decided you need coverage, you’ll go through the application and underwriting process. For a Haven Term policy, that means:
- Share a little bit about yourself online to get your real rate.
- Choosing a coverage amount and term length based on what you’re willing to pay per month.
- If you’re 45 or older, taking a medical exam to verify your self-reported health information.
- If you’re 44 or under, a medical exam may not be needed to finalize coverage, depending upon health information in your application.
Status: You’re not very healthy and are seeking coverage up to $250,000 (or more)
If you’re concerned the renewability rates on your policy are too high, good for you. It’s always smart to shop around and price compare. The right policy for you will largely depend on how much coverage you want and the amount of time you need coverage.
If your coverage needs are less than $250,000 and you’re seeking a longer term length, a simplified issue policy is worth checking out. These types of policies ask a minimal amount of health questions and don’t require a medical exam, which makes them a good choice for less healthy individuals. Keep in mind, you’ll pay more for the added risk the insurer is taking on by not knowing your full health picture and coverage is usually capped at $250,000.
If you only need coverage for a year or two (for example, until your mortgage is paid off) and are in need of a policy that’s more than $250,000, then paying the renewability premiums is probably your best option.
Either way, it’s good to compare your renewability rate to what a new, medically underwritten policy would cost, or to what a simplified issue policy would cost. This way, you ensure you’re getting the best value.
Status: You’re seeking a small policy for end-of-life expenses and debts
If your term policy is expiring and you have not qualified for simplified issue life insurance, but you want to have some coverage in place to help protect your loved ones, then a guaranteed issue life policy that isn’t medically underwritten may be worth considering. This type of coverage is designed to help cover final expenses – things like funeral costs, medical bills and credit card debt. The coverage level is usually capped at $25,000 or $50,000 depending on the insurer. A guaranteed issue policy is usually purchased by older, less healthy individuals, so premiums can be quite a bit higher. For example, a 60-year-old man might pay around $150 per month for $25,000 in coverage.
On the other hand, if you’re healthy and want coverage that’ll last a lifetime, a medically underwritten whole life insurance policy may be a better fit. And, you aren’t limited at $50,000 in coverage. Our parent company, MassMutual, sells whole life insurance and can be a resource for purchasing and pricing.
An expiring term means it’s time for a reset
If you have a term life policy with an expiring term, that means you’ve outlived the coverage you bought to protect your family from the unexpected — which is always cause for celebration. Now it’s time to reassess where you are and what protection you’ll need going forward.
If your policy term is set to expire in the next year, you have great timing. With time on your side, you’re sure to get the best value. Start by reading through your policy to confirm it offers guaranteed renewability (or call and ask the friendly customer service folks.) Once you know and assess your life insurance needs, you can determine the best course of action for you and yours.
Michael Davis is a freelance writer and editor who has covered everything from fashion and music to parenting, work, and finance. He has been a chef, restaurateur and record label owner.