To understand what happens at the end of a term life insurance policy, one must first understand exactly what a term life insurance policy is and not let a few key phases that a lot of life insurance agents like to throw around, such as:
- Convertible term or Guaranteed renewable term to confuse things.
This is why, in this article, we’re going to discuss what a term life insurance policy is and what happens in most cases when a term life insurance policy ends.
Questions that will be addressed in this article will include:
- What is a term life insurance policy?
- How does a term life insurance policy work?
- What are the benefits of a term life insurance policy?
- What are the drawbacks of a term life insurance policy?
- What happens to the money paid into a term life insurance policy if the policy ends before I pass away?
- What does “guaranteed renewable” really mean?
- What is a convertible term life insurance policy?
- What other options are there aside from purchasing a term life insurance policy?
- Why do most financial advisors tell their clients to buy term life insurance vs. whole life?
- How can I best ensure that I find the right life insurance policy for me?
Now, without further ado, let’s get started!
What is a term life insurance policy?
A term life insurance policy is a type of life insurance that provides coverage for a specific period of time, known as the term. The term can generally range from 5 to 30 years, and the policyholder pays a fixed premium during this time in exchange for the death benefit, which is the amount of money paid out to the policyholder’s beneficiaries upon their death.
Term life insurance policies do not accumulate cash value as permanent life insurance policies do, and they typically have lower premiums as a result. The coverage is designed to provide financial protection during a specific period of time when the policyholder has financial obligations, such as a mortgage or young children to support.
How does a term life insurance policy work?
When a policyholder purchases a term life insurance policy, they choose the length of the term and the death benefit amount. The premium is calculated based on the policyholder’s age, health status, and the length of the term.
If the policyholder dies during the term, their beneficiaries will receive the death benefit. If the policyholder outlives the term, the policy will expire, and the policyholder will not receive a payout unless they choose to renew the policy or convert it to a permanent life insurance policy (two options we will be discussing later on).
What are the benefits of a term life insurance policy?
One of the main benefits of a term life insurance policy is affordability. Term life insurance policies generally have lower premiums compared to permanent life insurance policies, making them a more accessible option for many people.
Term life insurance policies are also flexible. Policyholders can choose the length of the term that fits their financial obligations, and they have the option to renew or convert the policy to a permanent life insurance policy if needed (or at least this is how they are often described).
Finally, term life insurance policies provide peace of mind. Knowing that your loved ones will be financially protected in the event of your unexpected death can provide comfort and security.
Term Life Insurance Rates
We provided some term life insurance rates as an example of how much life insurance will cost in your 30s versus in your 50s.
Life Insurance in your 30s
Life insurance in your 50s
So, you see the huge difference in price between a 30-year-old and a 50-year-old.
What is your point?
The point is that locking into a longer-term period while you are young can save you a considerable amount of money in the long term.
Another strategy would be to get a new policy at age 40 or 45 that will last you until retirement so that you have a couple of policies in place for the needed amount of time you want, say until you are retired, the mortgage is paid off, or the kids leave the house.
Term Life Insurance Calculator
You can use our calculator below to get an idea of how much term life insurance you may need.
LIFE INSURANCE CALCULATOR
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What are the drawbacks of a term life insurance policy?
One drawback of a term life insurance policy is that it does not accumulate cash value. This means that there is no investment component, and the policyholder does not receive any money back if they outlive the term.
Another drawback is that if the policyholder wants to renew or convert the policy, they may be unable to qualify for coverage or the cost of such coverage may be too expensive.
What happens to the money paid into a term life insurance policy if the policy ends before I pass away?
The short answer is that if you outlive your term life insurance policy, the policy ends, and you do not receive a payout. However, policyholders who want to continue their coverage or recoup some of the money they paid into the policy have a few options.
Renew the policy
If your term life insurance policy is nearing its end and you still have financial obligations or dependents who would suffer financially in the event of your unexpected death, you may consider renewing it. Many term life insurance policies offer the option to renew for another term, usually at a higher premium rate based on your current age and health status. Renewing your policy ensures that you have continued financial protection for your loved ones.
What does “guaranteed renewable” really mean?
“Guaranteed renewable” is a feature of some term life insurance policies that allows the policyholder to renew their policy at the end of the initial term without having to undergo additional underwriting or medical exams.
This means that as long as the policyholder pays their premiums on time, they are guaranteed the ability to renew their policy at the end of each term, regardless of changes to their health or other risk factors.
For example, if you purchase a 20-year term life insurance policy with a guaranteed renewable feature, you can renew the policy for another 20 years at the end of the initial term without having to undergo additional medical underwriting or provide evidence of insurability. This can be particularly important if your health has deteriorated since you first purchased the policy, as you may not be able to qualify for coverage under a new policy without paying higher premiums or facing other limitations.
What usually isn’t mentioned, though, is that your new renewable term life insurance policy will need to be renewed each year. This means that your term life insurance policy premium will likely increase each year. And by “likely,” it’s probably safer to assume that it WILL increase, and it may increase by a lot!
What is a convertible term life insurance policy?
A convertible term life insurance policy is a type of term life insurance policy that includes a feature that allows the policyholder to convert their policy into a permanent life insurance policy at a later time without having to undergo additional underwriting or provide evidence of insurability.
With a convertible term life insurance policy, the policyholder typically has the option to convert their policy at any time during the term of the policy or up to a specified age, depending on the terms of the policy. This can be particularly useful if the policyholder’s needs change over time and they require a more permanent form of life insurance coverage.
When the policyholder converts their term policy to a permanent policy, they typically pay higher premiums. Still, the policy provides coverage for the policyholder’s entire life as long as they continue to pay the premiums. The exact terms of the conversion option, such as the types of permanent policies available and the conversion deadline, can vary between insurance companies and policies. Hence, it’s important to carefully review the policy terms before purchasing to understand the conversion options and any associated costs.
In general, convertible policies are great in that they do provide an additional option for those thinking about purchasing a whole life insurance policy today but aren’t quite comfortable with the price of a whole life insurance policy right now. Where people tend to run into trouble with these options is that most individuals, fail to realize when the option to convert will expire and don’t actually take advantage of this benefit in real life.
What other options are there aside from purchasing a term life insurance policy?
Not sure if purchasing a term life insurance policy is right for you because it’s primarily designed to provide coverage for a set period of time? No problem, there are other options out there. However, each will have its own set of pros and cons you should be aware of. Here’s a quick breakdown of some of the most common options you may encounter:
Whole life insurance:
Whole life insurance is a type of permanent life insurance that provides coverage for the policyholder’s entire life as long as they continue to pay the premiums. In addition to the death benefit paid to the policyholder’s beneficiaries upon their death, whole life insurance also includes a savings component that builds cash value over time. The premiums for a whole-life policy are typically fixed and guaranteed for the life of the policy, meaning that they will not increase over time as the policyholder ages. The cash value of the policy can be borrowed against or used to pay premiums.
Whole life insurance policies may also earn dividends, which can be paid out to policyholders or used to purchase additional coverage. Overall, whole life insurance is a good choice for those who want a permanent form of life insurance coverage with a savings component.
Pros:
- Provides coverage for the policyholder’s entire life.
- Includes a savings component that builds cash value over time.
- Premiums are typically fixed and guaranteed for the life of the policy.
- Cash value can be borrowed against or used to pay premiums.
Cons:
- Typically has higher premiums than term life insurance.
- Cash value may not grow as quickly as other investment options.
- May not be the best choice for those who only need coverage for a specific period.
Universal life insurance:
Universal life insurance is a type of permanent life insurance that provides coverage for the policyholder’s entire life as long as they continue to pay the premiums. Unlike whole life insurance, universal life insurance offers more flexibility in premium payments and death benefits.
The policyholder can adjust their premiums and death benefits as their needs change over time. Universal life insurance also includes a savings component that earns interest over time and grows tax-deferred.
The policyholder can use the cash value to pay premiums or withdraw funds tax-free. However, withdrawals or loans from the policy can reduce the death benefit paid out to the policyholder’s beneficiaries. Overall, universal life insurance is a good choice for those who want a permanent form of life insurance coverage with more flexibility than whole life insurance.
Pros:
- Provides coverage for the policyholder’s entire life.
- Offers flexibility in premium payments and death benefits.
- Cash value can be invested in various options, potentially leading to higher growth.
Cons:
- It may have higher fees and costs than other types of life insurance.
- Policy performance is tied to investment performance, which can be risky.
- It may not be the best choice for those who only need coverage for a specific period.
Variable life insurance:
Variable life insurance is a type of permanent life insurance that provides coverage for the policyholder’s entire life as long as they continue to pay the premiums. Similar to universal life insurance, variable life insurance offers more flexibility in premium payments and death benefits. However, the key difference is that the policyholder has some control over the investment options in the policy’s savings component.
The policy’s cash value is invested in various options, such as mutual funds, and the policyholder can adjust the investment mix as they see fit. The policy’s performance is tied to the performance of the investments, which can be risky.
Variable life insurance policies also typically have higher fees and costs than other types of life insurance. Overall, variable life insurance is a good choice for those who want a permanent form of life insurance coverage and are comfortable with taking investment risks.
Pros:
- Provides coverage for the policyholder’s entire life.
- Offers the potential for higher investment returns due to the ability to invest the cash value in various options.
- Policyholders have some control over the investment options.
Cons:
- It may have higher fees and costs than other types of life insurance.
- Policy performance is tied to investment performance, which can be risky.
- It may not be the best choice for those who are risk-averse.
Why do most financial advisors tell their clients to buy term life insurance vs. whole life?
Most financial advisors recommend their clients buy term life insurance over whole life insurance for several reasons.
First, term life insurance is generally less expensive than whole life insurance. Term policies offer a straightforward death benefit without the added cost of a savings component, which makes them more affordable for most people.
Second, term life insurance is more flexible than whole life insurance. With term life insurance, the policyholder can choose the length of coverage that meets their needs, such as 10, 20, or 30 years. After the term ends, the policyholder can either renew the policy or choose a different form of coverage (however, we’ve gone over why sometimes this isn’t a great option).
Finally, many financial advisors believe that the savings component of a whole life insurance policy is not an efficient investment strategy. The cash value of a whole life policy grows at a slow rate and may be subject to fees and taxes, which can reduce the overall value of the policy. Advisors often suggest that policyholders would be better off investing their money in other investment vehicles, such as a 401(k) or Roth IRA, which offer more flexibility and higher returns.
Overall, financial advisors often recommend term life insurance because it provides the necessary coverage at a more affordable cost and greater flexibility while also allowing policyholders to invest their money more efficiently elsewhere.
Although, it’s important to note that there are various reasons why certain individuals may opt for a whole life insurance policy over a term life insurance policy. Therefore, we shouldn’t assume that one type of policy is superior to the other for everyone.
How can I best ensure that I find the right life insurance policy for me?
Finding the right life insurance policy for you requires careful consideration of several factors, including your age, health, financial situation, and personal goals. Here are some steps we take with all of our clients to help ensure they find the right policy at the best price for them.
- Determine your coverage needs: Calculate how much coverage you need to protect your loved ones in the event of your death. Consider factors such as your debts, future expenses, and income replacement needs.
- Evaluate your budget: Determine how much you can afford to pay in premiums. Keep in mind that term life insurance policies are generally more affordable than permanent life insurance policies.
- Shop around: Get quotes from multiple insurance providers to compare prices and policy terms. Look for reputable companies with high financial ratings.
- Understand the policy details: Make sure you understand the policy’s terms and conditions, including the coverage amount, premium payments, and any exclusions or limitations.
- Consider working with a financial advisor: A financial advisor can help you evaluate your coverage needs and identify the best policy for your unique situation.
- Review your policy regularly: Life circumstances can change, so it’s important to review your policy regularly to ensure that it continues to meet your needs.
So, that concludes our overview of the potential outcomes when a term life insurance policy comes to an end. While it’s true that many term policies can be renewed or converted, it doesn’t necessarily guarantee that all issues will be resolved once the policy expires. This is why it’s crucial to comprehend your insurance requirements and plan accordingly, and at IBUSA, we prioritize this aspect of our service.
