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 many life insurance agents will use to answer this question. That feature, of course, is a guaranteed renewable term life insurance policy.
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 the 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 keep “renewing it” till you die.
As a result, we wanted to describe how term life insurance policies differ from whole life insurance policies and briefly highlight some of the pros and cons of each.
This way, you’ll better understand how these two policies differ and why one shouldn’t consider a guaranteed renewable term “comparable” to a whole life insurance policy because they are quite different (absent any bias, each has unique benefits).
Term life insurance:
Term life insurance is a type of life insurance policy that provides coverage for a specified term or 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, 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, 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 enables 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 covers 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 ages, making the coverage more expensive.
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 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 cash value growth 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 they do not increase with age.
Cons of whole life insurance:
- Higher premiums: Whole life insurance premiums are generally higher than term life insurance premiums.
- 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 challenging to understand than term life insurance policies.
What is a guaranteed renewable term life insurance policy?
A guaranteed renewable term life insurance policy 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 can 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 outlined 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 allow the insured 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: A guaranteed renewable term life insurance policy provides coverage for a particular period, 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 when 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 going 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 outlined 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 going 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” because one never really knows if they may end up needing it.
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 you might be interested in being able to extend your term life insurance policy using a guaranteed renewable option without having to provide proof of insurability.
I’m so interested 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, 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 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 permanent protection or cash value accumulation as whole-life or universal life insurance policies.
Some might say it’s difficult to argue how a guaranteed renewable term life insurance policy option could be bad. In most situations, we here at IBUSA would agree. However, sometimes, people will use this option as a “crutch” to an “excuse,” thinking that it’s a better benefit than it is.
Let’s 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 wanted to pay each month, so instead of purchasing a 20-year term life insurance policy, she decides to buy 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 15 years, between ages 35 and 50, a lot can happen to someone “medically.” 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).
Each year she chooses to renew, it will be more expensive. A rate that one day may become too costly to maintain. This 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 you can qualify for, the first thing you’ll need to do is take your time and consider all of your options. Don’t get fooled by buying the first life insurance policy offered at the lowest price!
The first life insurance policy 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.
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 they can offer.
The good news is…
Here at IBUSA, we specialize in helping folks find and qualify for a wide range of final expense insurance policies. 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? Call us today so we can show you what we can do for you!