Since one of the most common questions we receive from clients here at IBUSA is…
What happens at the end of my term life insurance if I don’t die?
We figured we ought to take a moment or two and describe one feature a lot of life insurance agents will use to answer this question. That feature of course is a guaranteed renewable term life insurance policy.
And while there is nothing inherently wrong in discussing a guaranteed renewable term benefit when describing what one can do when their term life insurance policy ends, it’s important for an insured to fully understand what this feature offers and that it is often not what they expect.
Which is why…
We wanted to take a moment and discuss what a Guaranteed Renewable Option is when attached to a term life insurance policy so that individuals who are currently shopping for a term life insurance policy and potentially comparing term vs whole life insurance options will understand how it can affect a policyholder later in life.
Questions that will be addressed in this article will include:
- Term life insurance vs whole life insurance
- What is a guaranteed renewable term insurance policy?
- What are benefits of owning a guaranteed renewable term life insurance policy?
- Potential drawbacks to a guaranteed renewable term?
- What can I do to ensure that I find the “best” term life insurance policy for me?
So, let’s dive right in!
Term life insurance vs Whole Life Insurance
Many people think that a guaranteed renewable term life insurance policy is “almost the same thing” as a whole life insurance policy or “just as good” as a whole life insurance policy because you can just keep “renewing it” till you die.
As a result, we wanted to take a moment describe how term life insurance policies differ from whole life insurance policies and very briefly highlight some of the pros and cons of each.
This way, you’ll have a better understanding of how these two policies differ and why one shouldn’t consider a guaranteed renewable term as “comparable” to a whole life insurance policy because they really are quite diffent (absent any bias each have their own unique benefits).
Term life insurance:
Term life insurance is a type of life insurance policy that provides coverage for a specified term, or length of time. This type of policy does not build cash value and is generally less expensive than whole life insurance.
Term life insurance is often used to provide financial protection for a specific period of time, such as 10, 20, or 30 years. It can be a good choice for those who want to protect their loved ones in the event of their premature death, but who don’t want or need the added features and cost of a permanent life insurance policy.
Some common uses for term life insurance include:
- Providing income replacement for a spouse or dependents in the event of the policyholder’s death
- Paying off a mortgage or other debts
- Funding a child’s education
- Providing financial security for a business partner
Term life insurance policies may be renewable, which means that the policy can be extended beyond the initial term at the end of the policy period. However, premiums will generally increase with each renewal. Some term life insurance policies may also have a conversion option, which allows the policyholder to convert the policy to a permanent life insurance policy without undergoing additional medical underwriting.
Pros of term life insurance:
- Lower premiums: Term life insurance policies generally have lower premiums than permanent life insurance policies, making them an affordable option for those on a budget.
- Temporary coverage: Term life insurance is a good choice for those who only need coverage for a specific period of time, such as during the working years or until a mortgage is paid off.
- Flexibility: Term life insurance policies may be renewable, which allows the policy to be extended beyond the initial term, and may have a conversion option, which allows the policyholder to convert the policy to a permanent life insurance policy without undergoing additional medical underwriting.
Cons of term life insurance:
- Limited coverage: Term life insurance only provides coverage for a specified term and does not build cash value.
- No savings component: Unlike permanent life insurance policies, term life insurance does not have a savings component that builds cash value over time.
- Increased premiums with age: Term life insurance premiums may increase as the policyholder gets older, making the coverage more expensive over time.
Whole life insurance:
Whole life insurance, also known as permanent life insurance, is a type of life insurance policy that provides coverage for the entirety of the policyholder’s life. In addition to providing a death benefit, whole life insurance also builds cash value over time, which can be borrowed against or withdrawn.
Whole life insurance is a good choice for those who want lifelong protection and the ability to build cash value. The premiums for whole life insurance are generally higher than those for term life insurance, but the policy remains in force as long as the premiums are paid.
The cash value of a whole life insurance policy can grow tax-deferred, meaning that policyholders do not have to pay taxes on the growth of the cash value until it is withdrawn.
Some common uses for whole life insurance include:
- Providing lifelong protection for loved ones
- Funding funeral and burial expenses
- Leaving a financial legacy
- Supplementing retirement income
Pros of whole life insurance:
- Lifelong protection: Whole life insurance provides coverage for the entirety of the policyholder’s life, as long as premiums are paid.
- Cash value growth: Whole life insurance policies have a cash value component that grows over time and can be borrowed against or withdrawn.
- Fixed premiums: The premiums for whole life insurance are fixed, meaning that they do not increase with age.
Cons of whole life insurance:
- Higher premiums: Whole life insurance premiums are generally higher than those for term life insurance.
- Limited flexibility: Whole life insurance policies generally have less flexibility than term life insurance policies, as they do not have renewal or conversion options.
- Complexity: Whole life insurance policies can be complex and may be more difficult to understand than term life insurance policies.
What is a guaranteed renewable term life insurance policy?
A guaranteed renewable term life insurance policy is a type of life insurance that allows the policyholder to keep their coverage in force for a specific period of time, such as 10, 20, or 30 years. The policy is “guaranteed renewable” because the policyholder has the right to renew their coverage at the end of the term, as long as they pay their premiums on time.
Under a guaranteed renewable term life insurance policy, the policyholder is guaranteed coverage as long as they meet the requirements set forth in the policy, and the insurance company cannot cancel the policy or refuse to renew it due to the policyholder’s age or health. However, the insurance company may increase the premium on a guaranteed renewable term life insurance policy at the time of renewal, based on the policyholder’s age and other factors.
Which means that…
Unlike a term life insurance policy without this option, which automatically ends after the original term period, guaranteed renewable term policies will offer the insured the option to continue their policy by utilizing their guaranteed renewable option versus applying for a new life insurance policy that they must qualify for.
Guaranteed Renewable Pros
There are several benefits to a guaranteed renewable term life insurance policy:
- Coverage for a specific period of time: A guaranteed renewable term life insurance policy provides coverage for a specific period of time, such as 10, 20, or 30 years. This can be a good option for people who only need coverage for a specific period, such as the time it takes to pay off a mortgage or raise children.
- Flexibility to renew coverage: The policyholder has the right to renew their coverage at the end of the term, as long as they pay their premiums on time. This allows the policyholder to continue their coverage without having to go through the underwriting process again.
- Affordable premiums: Guaranteed renewable term life insurance policies may have lower premiums than other types of life insurance, making them a more affordable option for people on a budget.
- Guaranteed coverage: The policyholder is guaranteed coverage as long as they meet the requirements set forth in the policy, and the insurance company cannot cancel the policy or refuse to renew it due to the policyholder’s age or health.
- Option to convert to permanent coverage: Some guaranteed renewable term life insurance policies allow the policyholder to convert to a permanent life insurance policy, such as a whole life or universal life insurance policy, without having to go through the underwriting process again. This can be a good option for people who want the flexibility to change their coverage as their needs change.
It’s fair to say that having a guaranteed renewable option attached to one’s term life insurance policy is probably never a “bad thing” to have because at the end of the day, one never really knows if they may end up needing it.
For example…
Imagine if you found yourself or a loved one in a situation where they were diagnosed with a terminal illness with only six months to live while simultaneously owning a $250,000 term life insurance policy that is set to expire in 30 days.
In a situation like this…
It’s not difficult to imagine why having the ability to extend one’s term life insurance policy utilizing a guaranteed renewable option without having to provide proof of insurability might be something you would be interested in.
So interested in, that even having to pay an increased premium for this benefit wouldn’t be something you would object to!
“In cases like these, a guaranteed renewable option is truly a blessing.”
Guaranteed Renewable Cons
Some potential drawbacks or “cons” of a guaranteed renewable term life insurance policy include:
- Limited coverage: A guaranteed renewable term life insurance policy only provides coverage for a specific period of time, such as 10, 20, or 30 years. If the policyholder dies after the term has ended, their beneficiaries will not receive the death benefit.
- Premiums may increase at renewal: The insurance company may increase the premium on a guaranteed renewable term life insurance policy at the time of renewal, based on the policyholder’s age and other factors. This can make the policy more expensive over time.
- Limited benefits: Guaranteed renewable term life insurance policies do not offer the same level of permanent protection or cash value accumulation as whole life or universal life insurance policies.
Now, some might say it’s difficult to argue how a guranteed renewable term life insurance policy option could be a bad thing, and in most situations we here at IBUSA would agree. However, there are times when people will use this option as a “crutch” to an “excuse” thinking that it’s a better benefit than it actually is.
For example…
Let’s take a look at a situation where a woman in her mid-forties wants to purchase $250,000 term life insurance to protect her two children, ages 6 and 10.
Ideally, she would want to purchase a policy that would last until both were out of college and on their own, which means that a 20-year term life insurance policy would probably be her best bet.
The only problem is…
That 20-year term life insurance is more than she really wanted to pay each month so instead of purchasing a 20 year term life insurance policy, she decides to purchas a 15 year term life insurance policy with a guaranteed renewable option because she knows she can always extend her policy later on if she needs to.
And here is where…
We can run into some problems because, over the course of 15 years between ages 35 and 50, a lot can happen to someone “medically,” and in this imaginary scenario, our client was diagnosed, treated, and cured of stage 4 breast cancer.
“Which is great!”
But the only problem is that now, as it turns out, she will need her insurance to last beyond the 15 years that she originally purchased her coverage for, which means that she is now going to have to utilize the Guaranteed Renewable Option, year after year for at least five more years after her original policy has expired (due to her pre-existing medical condition).
And…
Each year she chooses to renew, it will renew at a more expensive rate. A rate that one day may become too expensive to maintain.
Which will be very unfortunate for her, because it will likely leave her with little or no options, due primarily to her previous stage 4 breast cancer diagnosis.
“So, in this case, because the client felt they could rely on a guaranteed renewable option later in life, they are now going to be forced to rely on it due to an unfortunate medical diagnosis.”
This brings us to the last topic that we wanted to take a moment and discuss here in this article, which is…
What can I do to ensure that I find the “best” life insurance policy for me?
If you want to make sure that you find the “best” life insurance policy that you can qualify for, the first thing you’re going to need to do is to take your time and consider all of your options.
Don’t get fooled by buying the first life insurance policy that you’re offered at the lowest price!
Sure…
The first life insurance policy that you look at may be the “best” one, but now you have the information and knowledge you’ll need to make the right decision.
So, ask a lot of questions. Be sure to compare different life insurance companies against one another.
And be sure that the life insurance agent offering you a particular life insurance policy isn’t offering that one because it’s the only “type” of final expense insurance policy that he or she can offer.
The good news is…
That here at IBUSA, we specialize in helping folks find and qualify for a wide range of final expense insurance policies, and since we operate as an independent life insurance brokerage, we don’t have to rely on just one or two options.
Instead, we can shop dozens of different companies for you and help you decide which one might be right for you.
So, what are you waiting for? Give us a call today so that we can show you what we can do for you!
