What happens when a term life insurance policy expires

The truth is, sooner or later, we all expire. And if you expire before the end of your term life insurance policy’s term, your designated beneficiaries will receive the death benefit. That’s how life insurance works.

But what if you don’t?

It’s a common question for anyone purchasing life insurance. After all, term life insurance is a type of coverage designed to provide financial protection over an agreed-upon period, or “term.”

And most experts recommend choosing a term length that lasts until major expenses like a mortgage or college tuition are paid off, until you no longer have dependents who count on your salary to pay for everyday expenses like groceries, and/or until you’re no longer drawing the salary that a life insurance policy is intended to replace in the event of your death.

All of which is to say, you might very well outlive your term life insurance policy. So what happens next? Read on to understand what options are available if your term policy expires.

What is term life insurance?

Term life insurance is a straightforward, cost-effective way to provide your family with financial protection in case of your death. Decide how much coverage you need, and for how long, and then you’ll pay a monthly premium based on your choices, in addition to factors like your age and your health.

If you die during that term, the insurer will pay your beneficiaries a tax-free lump sum payout they can use that money however they see fit — for example, to cover final expenses like the cost of burial or a funeral, to pay for groceries and bills, tuition, mortgage or rent, and so on.

So how much coverage should you get? A common rule of thumb is that you should get a policy worth 5 to 10 times your annual salary, to help ensure that there is enough money left behind for your family in case you’re no longer around to support them.

And how long should your term be? Typically, you can get anywhere from 10 to 30 years of coverage. Again, most people choose a period of time that covers the years until they retire, pay off their mortgage, or no longer expect to have dependents that, well, depend on them to pay for basic necessities. (Pro tip: For most people, “dependent” = kids.)

This differentiates term life insurance from permanent life insurance, which lasts until you die. Because this type of insurance covers the years where you’re older and less healthy — in other words, when actuaries think you’re more likely to die — it typically costs more than term life insurance.

If you are looking for affordable life insurance that covers the years where your death would leave your loved ones especially financially vulnerable, term life insurance is often a good fit.

How to determine your term length

Let’s break this down a little further. When it comes to choosing the right term life insurance policy, your individual needs and situation should be taken into consideration. Three important factors are your expected long-term expenses, your current debt obligations and your age and life stage.

Long-term expenses

Think about some of the things you expect to pay for over the long haul. It could be a mortgage, or the monthly rent. It could be your child’s college tuition, or medical care for a loved one with a chronic illness.

Now, imagine if you weren’t around to pay for those things. How would your family make up for the loss of your income?

Term life insurance is a way to make sure that those who depend on you financially can pay for things in the event that you’re not around. Many of those things have finite time periods, such as a 30-year mortgage or your planned retirement, so you can calculate your term according to those plans.

Current debt obligations

The sad truth is, if you have debt, it doesn’t expire when you do. And another person’s debt is the kind of inheritance no one wants to receive.

If you have any existing loans, mortgages, college loans, or other debts that would need to be paid off after your death, you’ll want to make sure that you select a term length that factors those in.

Your age and lifestage

This is pretty straightforward. How old are you? Are you married (or soon to be)? If so, for how long? Do you have kids? How old are they?

Where are you in your career? Are you your family’s sole breadwinner? How much are you earning, and how might that affect your budget for life insurance?

Do you own your home, or do you plan to? When do you think you’ll be financially independent — when you retire, sometime sooner, never?

So yes, straightforward. But also, a lot to answer.

Generally, if you’re younger, you’ll need a longer term. If you’re older, you’ll need a shorter term. There are complicating factors — maybe you expect to be independently wealthy when you’re 35, or maybe you expect to be paying off a mortgage into your late 60s — but overall, you’re looking for coverage during the years when other people depend on you financially.

Bottom line

Everyone wants the goldilocks amount of coverage: Not too much, not too little, but just right.

That said, is it better to get a term that’s too long or too short? Get a term that’s too long, and you will be paying for coverage you don’t really need at the end of your term. (You’ll also likely be paying a higher premium, since that longer term will cover you when you’re older.)

But get a term that’s too short, and you risk not having coverage when you need it. Or you’ll need to buy a new policy when you’re older, and rates will be higher. (There’s also the not-small risk your health will decline.)

You might also want to think about what you can afford. If you’re a 30-year-old man in excellent health, you might pay $29.99 per month for a 30-year Haven Term policy worth $500,000. That same coverage would cost $14.72 per month for a 15-year term. (The tradeoff, of course, is that you might not be covered in the years you need it most, and that the rate might be much higher in 15 years when you apply for more coverage.)

At the end of the day, you’re making an educated guess, and only you know for sure what term makes sense for you. That said, you can get help by using an online insurance calculator to help you get a sense of how much coverage you need, and what it will cost. Factor those things alongside your budget, and go from there.

What happens if your term is too short?

Back to the main topic: If you find yourself in a situation where the term expires for your existing life insurance policy, but you still require coverage, you have a few options.

Buy more life insurance coverage after your term expires

The most obvious solution is to purchase a new life insurance policy.

Keep in mind that the cost of a term life insurance policy generally increases with age and declining health, which is why the best option is to get long-term coverage now, while you’re younger and (likely) healthier than you’ll ever be.

But if not, you can get a shorter term (typically 10 years) to bridge the gap until you no longer need coverage.

Renew your life insurance coverage after your term expires

Similar to the above option, you can renew your coverage when your term expires. Most policies have a guaranteed renewability clause in their contracts — that is, you don’t have to reapply for the same coverage. This means you can continue to be insured for the value of your policy, which would then be paid out in the event of your death. And you can choose how long to continue the policy.

Also similar to the above? The cost will increase, for the same reasons. (Increased age; likely decreased health.)

Buy more life insurance coverage before your term expires

If you still have some years left on your term policy, you can consider increasing your coverage by buying an additional policy. As with your earlier policy, you’ll lock in the lowest premium rate by getting it sooner rather than later, given you’re as young and in good health today as you likely ever will be.

If you choose to do so through the same insurer, you will also enjoy the benefit of managing your accounts in the same place, and dealing with a known quantity during the application process.

Another option is life insurance laddering. It’s a little complicated, but life insurance laddering is essentially buying multiple life insurance policies so you’ll have different amounts of coverage over different periods of your life. The thinking is that doing so helps you pay for only the coverage you need, only when you need it.

This can make sense if you’re concerned that your life insurance policy is too short. Perhaps you’ve taken on unexpected debt, or perhaps you got a promotion that means you expect to make a higher salary in your later years — either way, your life insurance needs might be different than they were when you first bought your policy.

So, what happens when the term expires for a life insurance policy?

In a word, nothing. If you outlive your policy, congrats: You’re alive. And you no longer need to pay life insurance premiums, and your coverage is over.

If your term was too short, we’ve outlined your options above. But if your term length was just right, congratulate yourself on a well-chosen policy length, soak up the remaining peace of mind that your policy provided, and enjoy the next chapter of your journey.