Term life insurance provides coverage for a specific period, typically ranging from 10 to 30 years. Unlike permanent life insurance, which offers lifelong protection, term life insurance ends once the term expires. However, there are options to extend coverage through policy renewals or conversions, which can be crucial in maintaining continuous protection without needing to purchase a new policy. Understanding what happens if you outlive your term life insurance is essential for planning your financial future.

What happens when term life insurance expires?

When term life insurance expires, you might still need coverage for various reasons. While it’s common to purchase term coverage with the expectation that your financial responsibilities will decrease over time, circumstances such as ongoing debts, dependents still needing support, or new financial obligations may prompt you to extend your coverage.

When a term policy expires, it typically ends without any action needed from the policyholder. The insurance carrier sends a notice, premiums stop, and there is no longer a death benefit. However, if the policy included a return-of-premium feature, the policyholder would receive a check for the premiums paid during the term.

Additionally, some term policies offer the option to renew on a year-by-year basis after the initial term expires. Renewal maintains the original coverage amount but is usually more expensive each year due to age-related risk increases. This option is particularly useful for those who develop health issues that make obtaining new insurance challenging.

If you find that you need permanent coverage, many term policies include a conversion rider. This allows you to convert your term policy into a permanent policy without undergoing underwriting again. However, conversion riders have an expiration date, and not all policies allow conversion until the end of the term.

Purchasing coverage after you outlive your term life insurance

If you anticipate needing coverage after your term policy expires, it’s wise to start evaluating other options well before the term’s end date. This allows you to take advantage of your policy’s conversion rider, if offered, and if it suits your circumstances. It’s important to note that you typically cannot add a conversion rider once the policy is in force; it must be included from the start, depending on the insurer.

Term conversion

As previously mentioned, many term policies include a conversion rider, allowing you to convert your term policy into a permanent one without a medical exam. The timeframe for this conversion varies by policy. Some policies only allow conversion within a specific period, such as the first few years, while others permit conversion until the end of the term. For instance, a 20-year term policy might limit conversion to the first 15 years. These conversion limitations typically apply if you want to convert without providing evidence of insurability. If you wish to convert outside the specified period, you will usually need to go through medical underwriting.

Term conversion is a strategic choice for those who develop a health condition or become otherwise uninsurable but still need life insurance after their term policy ends. Instead of applying for a new policy, which could be more expensive due to health changes, converting an existing term policy can be a cost-effective option. Conversion rates are based on the original risk class awarded when the policy was first taken out, typically without requiring a new medical exam.

However, permanent life insurance is inherently more expensive, and premiums will rise with conversion due to increased age. Many insurers offer partial conversions to make this transition more affordable. For example, converting a $500,000 term policy entirely might significantly increase premiums, so you might opt to convert $250,000 instead, balancing the need for permanent coverage with manageable payments.

Understanding your policy’s conversion options and any conversion deadlines at the time of purchase can help you plan more effectively and streamline continuous coverage for you and your loved ones.

Renew your term coverage

Most term life insurance policies offer the option to renew for a limited number of years without requiring evidence of insurability. This means you can extend your coverage even if your health has changed. For example, a 10-year term policy may be renewable each year for up to 10 additional years. During each renewal, your premium will increase based on your current age.

Although premiums for renewed policies typically rise significantly each year, this renewability option is especially beneficial if you develop serious health issues, as it ensures continued financial protection for your family without needing a new medical exam. The increase in premiums due to age at renewal is usually less significant than the potential increase or inability to secure a new policy if you were to reapply after being diagnosed with a serious health condition. This makes the renewability feature a valuable safeguard against the uncertainties of future health issues.

Purchase a new term policy

For relatively young individuals in good health, the most affordable life insurance option may be to purchase a new term policy. Premium costs can decrease further by opting for a lower death benefit and a shorter term, which is a suitable choice for those who need less coverage than when they first bought their initial term policy.

For example, if someone’s youngest child is still in high school when their 20-year term policy expires, a new 10-year policy may be sufficient to ensure their child completes college and no longer requires financial support from them.

It’s important to remember that a medical exam will likely be part of the underwriting process for any new term policy. If there are new health issues since the first policy, the rate will likely increase. Additionally, age is a significant factor, as older individuals typically pay more for their term life insurance policies.

Purchase a permanent policy

Another option for those without a term conversion rider is to purchase a permanent life insurance policy once the term policy expires. Permanent life insurance, such as whole life insurance, tends to be more expensive—sometimes up to ten times more costly—than term policies. However, costs can vary based on personal factors and policy choices. Here are some key benefits of permanent life insurance:

  • Lifetime Coverage: Permanent policies provide coverage for the policyholder’s entire life, as long as premiums are paid. However, “lifetime” typically refers to ages 95 to 121, which is the maximum coverage range set by insurers.
  • Cash Value Component: These policies include a tax-deferred cash value component that grows over time. This cash value can be used as collateral for a loan or withdrawn as needed.
  • Safe Investment: While the cash value may not earn as much interest as investments in the stock market, it is generally considered a safe option and can play a valuable role in financial planning. However, it shouldn’t be relied upon as the primary means of saving for retirement, as life insurance is fundamentally an insurance product, not an investment vehicle.

There are several types of permanent life insurance, each with distinct features:

  • Whole Life Insurance: Offers fixed premiums, a guaranteed death benefit, and a cash value component that grows at a guaranteed rate.
  • Universal Life Insurance: Provides flexible premiums and death benefits, with a cash value component that earns interest based on current market rates or a fixed rate.
  • Indexed Universal Life Insurance: Similar to universal life but with a cash value component tied to a stock market index, allowing for potential higher returns.
  • Variable Universal Life Insurance: Combines the flexible features of universal life insurance with investment options for the cash value, enabling policyholders to invest in various sub-accounts.

While permanent policies may not be suitable for everyone due to their higher costs, they can be beneficial in specific situations. For example, they might be ideal for individuals with a child with a disability who will never achieve financial independence or for a non-working partner who would require financial support if the primary earner passes away.

Final expense insurance

The median cost of a funeral in the United States is $7,848. For those looking to avoid passing end-of-life expenses onto their heirs and who don’t need a substantial payout, final expense or burial insurance is a viable option. Final expense life insurance typically offers low coverage limits, often capped at $10,000 or $25,000, making it less suitable for income replacement. Additionally, premiums tend to be relatively high since no medical exam is required, which means the insurance company takes on more risk. As with other types of insurance, costs increase with higher coverage amounts and as the policyholder ages.

Final expense insurance can be an excellent choice for older adults whose main objective is to prevent their beneficiaries from facing financial burdens related to their death. It may also be appropriate for individuals with pre-existing health conditions or those who have previously been denied standard life insurance.

Do I still need life insurance?

As your term life insurance policy approaches expiration, it’s a good time to assess whether you still need coverage. Your decision will depend on various personal and financial factors.

You may still need life insurance if you have:

  • Dependents Relying on Your Income: If you have dependents who depend on your income for living expenses, education, or other needs, maintaining life insurance can provide financial security for them.
  • Outstanding Debts: If you have significant debts, such as a mortgage or car loans, life insurance can ensure these obligations are paid off without burdening your loved ones.
  • Business Obligations: For business owners, life insurance can aid in succession planning, cover key personnel, or repay business loans in the event of your death.
  • Significant Wealth: Life insurance can be a valuable tool for estate planning, providing liquidity for estate taxes or leaving a financial legacy for heirs.
  • Special Needs Dependents: If you have a dependent with special needs who will require lifelong support, life insurance can ensure their needs are met even after you’re gone.

Conversely, you might not need life insurance if:

  • Dependents Are Financially Independent: If your children or other dependents are financially self-sufficient, you may no longer require coverage.
  • Debts Are Paid Off: If you’ve settled major debts and have enough savings or assets to cover remaining obligations, continuing life insurance might be unnecessary.
  • Adequate Retirement Savings: If you have sufficient retirement savings and investments to cover living expenses for you and your spouse, additional life insurance may not be needed.
  • Spouse’s Financial Stability: If your spouse or partner is financially secure and can maintain their lifestyle without your income, the need for life insurance may be reduced.

Evaluating your current financial situation and future needs is crucial in deciding whether to maintain or obtain new life insurance coverage. It may be beneficial to consult with a financial advisor or licensed insurance professional to help you make an informed decision based on your specific circumstances and goals.