With Term Life Insurance rates being lower than ever before, there’s no wonder that so many policies are sold today, especially for consumers who need a very large death benefit in order to replace their income. Term life insurance rates are much lower than whole life, indexed universal life and universal life because the mortality rate for term insurance policyholders is dramatically lower than the mortality rates for permanent insurance policyholders.
Simply put, term insurance policyholders rarely die during the term of their insurance policy and many policyholders convert their term insurance policies before their term insurance coverage expires.
Is your term life insurance coverage about to expire? We can help guide you down the path to converting your policy so that your can keep your life insurance coverage.
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You have 4 Choices if your Term Insurance is Expiring
Even though most insurance companies will offer a renewal for term insurance, the rates are based on your current age and renewal policy period is typically one year. This means that each anniversary of your insurance policy your cost of term insurance is going to increase. Fortunately, term insurance policyholders have options:
1. Renew Your Policy
Many experienced life insurance agents believe renewing your policy might be a great choice for a policyholder with health issues. You’ll benefit from being offered guaranteed insurance coverage, although, you will much be charged higher rates because of your age at renewal.
Life insurance carriers primarily base their prices on your age and your health. Being 30 years older than when you originally purchased your policy would mean you’re much closer to your life expectancy. Certainly, that’s a discouraging thought; however, it is this data that insurance underwriters take into account when determining rates.
It’s important to note with term insurance, if you outlive your policy, you won’t get a refund of your premiums. There is, however, an exception to this rule. If you elect the Return of premium option when you purchase the policy, the insurer will refund your premiums in a lump sum payment that is non-taxable. The disadvantage is you are going to pay more premium because of the cost of the rider.
2. Purchase a New Insurance Policy
Purchasing a brand new term insurance policy may be a smart decision provided you are in decent health and still young. For example, if you bought a 10-year term policy when you were 25 and in good health, the cost of a new policy at age 35 and still in good health will not lead to sticker shock.
This choice will probably cost less than what a conversion costs as long as you are less than 70. Unfortunately, it will likely require a medical exam and the underwriter will consider your medical history that you’ve listed on your application to determine your health class for rating purposes.
It will smart to recalculate how much your loved ones will require. You probably completed this exercise 20 years ago, but life changes and so does need for life insurance. Your children may have moved out and you may have paid off your mortgage which typically results in purchasing an insurance policy with a lower death benefit.
You might decide to stay with term insurance but change to a different company. It’s possible that shopping your policy might save you some money, but bear in mind that you are much older than when you initially purchased your term policy, so expect to pay higher premiums.
3. Drop Your Insurance Altogether
Although this option may seem ridiculous on its face, you could choose to drop your insurance policy altogether.
If you are single with no children and you’ve saved enough money to take care of final expenses like a funeral and burial, you might make up your mind to go without life insurance. Having said that, give it serious consideration to making certain your loved ones will not be burdened with your final expenses when you pass away.
4. Convert Your Term Insurance to Whole Life or Universal Life
Most insurers allow you the option of converting your term insurance to permanent insurance. It makes perfect sense to be certain this option is available or that you can add it the policy at the time of purchase. Permanent life insurance policies like whole life and universal life will stay in force for a lifetime as long as you pay your premium.
Term life insurance is cheaper which makes it a preferred choice for individuals with a modest budget. Term insurance might be an ideal choice when you’re age 20 or 30, but you will probably want something that is permanent if you’re 50 or older. Also, by the time you have turned 50, you’ll probably have a much better financial situation and a better paying job.
If you choose to convert your term policy to permanent life insurance, you will typically pay higher premiums because the policy will be rated on your new age and permanent life insurance is generally more expensive than term insurance. But, the benefit of whole life or universal life insurance is that it builds cash value over time that you will have access to. That means you can withdraw money from the policy using policy loans or withdrawals although doing so might leave your loved ones with a lower death benefit when you die.
The amount you will pay for permanent life insurance will depend on the applicant and the insurance company but you won’t have to worry about medical underwriting because when you convert your policy, the insurer does not require a medical exam or proof of insurability. You will likely receive the same rate class as you had on your term policy. If you were rated a smoker but no longer smoke, you can get non-smoker rates on your policy. If you have developed a health issue such as diabetes, cancer, heart attack or stroke, you can still convert your policy at the rate class you had on your term policy.
How does Term Conversion Work
A term conversion takes place when you exercise your option to convert all or some of your term insurance policy to a permanent life insurance policy like whole life or universal life that is offered by the same insurer. Most term life insurance policies are issued with the conversion privilege but if not, the applicant can typically add it the option as a rider. This option means that if you decide you want permanent life insurance you are allowed to your coverage regardless of your health as long as you exercise the conversion privilege before the deadline stated in your insurance policy.
The Benefits of Converting Your Term Life Insurance
- You will maintain the health class that was used in determining your rates for the term policy when you convert, even if you have developed serious or multiple health issues.
- You can determine when and how much of insurance coverage to convert as long as it is prior to the conversion expiration date.
- You can start building your cash value with the new permanent policy so you can have access to the funds if necessary at a later date.
- You can choose to have life insurance coverage for a lifetime or less than a lifetime.
Why Convert when I can just Renew?
Conversion may not be the best option for every policyholder, especially when you consider policyholders who cannot afford the higher premiums that come with permanent life insurance. Take a look at the following six reasons that you should consider:
- Permanent Life Insurance Builds Cash Value
Conversion may not be the best option for everyone, especially for policyholders who cannot afford the higher premiums that come with permanent life insurance. Take a look at the following six reasons that you should consider:
Permanent life insurance policies build cash value over time that you can access if you need it. This provides peace of mind when you realize you have access to a cash value account when you need it. Typically it’s not practical to withdraw funds from your cash value account unless you’ve used up all other resources that you might have. You’ll typically pay a fee and interest if you withdraw money from your cash value account and your death benefit may be reduced by any unpaid loans.
It makes sense to think of your permanent life insurance as a tax-free savings alternative for your survivors. Don’t deplete it while you’re alive unless you have no other options.
- Your surviving loved ones are unlikely to collect on your term policy
Term life insurance is typically the most affordable life insurance option and there is good reason for it. Most policyholders outlive their term insurance, which means the insurer will not have to ever worry about paying a claim. Conversely, an insurer will always have to pay a claim under a permanent life insurance policy as long as it remains in force.
You can consider term insurance like any other insurance. You pay into it like health insurance, auto insurance, or homeowners’ insurance, but you don’t actually get anything back unless you file a claim. On the other hand, permanent life insurance is more like an investment. You or your surviving loved ones will eventually get the money back when you die or if you decide to take cash out of the policy.
- You’ll be better off financially than when you purchased your term insurance.
Permanent life insurance like whole life or universal costs a lot more and many people, particularly those who are just starting their family, simply cannot afford to buy it. This is particularly true if you have health issues that land you in a higher rate class.
On the other hand, as you get older, you’ll likely be earning more and have improved your financial outlook. This is a great time to convert your term insurance to a permanent life insurance policy. Although permanent life insurance will cost more than term insurance, it will create a savings account that you can access when you feel it is appropriate. Whole life insurance cash value can be borrowed against to be used for financing big ticket items or even funding your retirement.
- If You have some health Problems
In most cases, you will not be required to undergo a medical exam when you convert your term life policy to a permanent one. If you choose to allow your term policy to lapse and then decide to apply for another policy, you’ll likely be required to have a medical exam. Therefore, unless you are in better health than when you purchased your term policy or have quit smoking for a least a year, the conversion privilege is the safest option.
Make certain that you check with your agent or carrier regarding the time period in which a medical exam is not required. If you bought your term insurance decades ago, your contract might still require a medical exam.
- Consider the financial needs of surviving loved ones
In most cases, when the primary breadwinner in a family dies, the surviving loved ones will need financial help to be able to continue on financially. In these cases, a permanent life insurance policy can also be considered a savings account because you will have access to the money while living and your loved ones will receive the death benefit when you die.
- After your term conversion, your remain level for a lifetime.
Once you’ve converted your term insurance to permanent life insurance, your periodic premiums remain the same for a lifetime. Although your life insurance is going to cost you more, you are guaranteed the new periodic premiums will not change and that your policy cannot be canceled by the insurance company as long as you pay your premiums.
Does Term Insurance automatically Expire at the End of the Term?
When your term insurance reaches the end of the policy term or rate guaranteed period, your policy will not necessarily end automatically. This could be a positive or a negative depending on your circumstances.
If you check near the back of your policy contract, there is a table detailing your year to year cost should you decide to continue with the policy. For example, If you purchased a 20-year policy, you will see a fairly substantial price increase for year 21, after your policy expires. You should continue to notice substantial rate increases year after year thereafter.
If you don’t want to continue the policy past the low-cost rate guarantee period, and you are paying using automated bank draft, you’ll need to notify the insurance company and your bank that you want to cancel the insurance coverage at the end of the term. If you don’t, that substantially larger premium could be debited from your checking account without any warning.
The Bottom Line
Certainly, it’s no secret that term life insurance is the most affordable insurance product in the marketplace. Unfortunately, term insurance only provides temporary coverage and you are very likely to outlive your coverage. This is why the conversion privilege is so important to term policyholders who wish to continue their life insurance for a lifetime.
Life insurance companies have different term conversion options. Some of the better options we see are from companies like North American, Midland, Prudential, Mutual Trust, Mutual of Omaha and Transamerica.
Regardless of who your policy is with we can guide you through the conversion process.