Is your term life insurance policy about to come to an end?
While it is actually designed to do just that, it may mean you have a decision to make about what to do:
- Do you keep it?
- Do you replace it?
- Do you go without coverage?
Chances are, your financial situation may have completely changed since you bought the expiring policy.
For that reason, you’ll need to reassess your coverage needs entirely.
Here’s how to evaluate your next move to make sure you take advantage of your maturing term policy and everything it may have left to offer.
What To Do With Your Maturing Term Life Insurance Policy
First things first, you need to find out a few more details about the policy you have so you can gauge how many options you have, and how long you have to make the final decision on what to do.
Every level term life insurance policy is designed to end after a set period of time, but you should know they don’t actually end, per say.
The only thing ending is the level payment period. The coverage is not.
Let’s go through a quick example:
You purchased a 10-year term for $500,000 in coverage when you turned 30. The payment was about $45/month, and you have come to the end of the term 10 year period.
Your policy will not lapse after the 120th month; in fact, the policy will likely go all the way up to age 90, if you wanted to keep it that long.
However, the price is going to change, and pretty drastically!
Here’s a quick view of what is actually happening:
|1 – 10||$500,000||$45/month|
While you can keep your coverage beyond the initial 10-year period, you’ll see the new price is substantially larger.
Almost 10x more expensive in just a few years!
You have 3 basic options, at this point:
- Keep the policy. This is probably your worst option, and one you should avoid.
- Replace the policy. This is what most people will do if they still need life insurance.
- Cancel your coverage. If you no longer need life insurance, you can just cancel it without penalty.
Let’s talk about the pros and cons of each one, and why you might choose to elect one of the other.
Keeping Your Coverage
There are situations where you may want to keep the coverage.
However, it’s probably going to be one of your more expensive options, and the policy itself may require a little adjusting through a reduction in benefit or policy conversion.
You should only elect to do this if you are either too old or not healthy enough to qualify for new coverage, or you have a conversion privilege you would like to utilize.
If you’re not healthy enough to replace this policy with a new one, you may have purchased a policy with a conversion privilege, meaning you can elect to convert the term policy to a permanent one without any underwriting or requirements.
Typically, the insurance company will allow conversion up to the 10th policy anniversary, so if the maturing policy is a 20 or 30 year term, this may not even be an option.
If you do have this option, you can elect to start a permanent plan up to a certain amount of your choosing.
Of course, you will want to reduce the benefit amount, sometimes as much as 90%, since you not only won’t need so much coverage later in life, but also to keep the costs down.
If you truly needed the full death benefit amount, and you couldn’t afford the permanent conversion, you might be forced to keep the term coverage in place and pay the higher price.
This is unlikely, though, and probably only beneficial if you knew the insured would need to file a claim sooner than later.
If cost is an issue, and you still need quite a bit of coverage for a short duration, you also have the option of reducing the face amount, or death benefit, to attempt to get the price point a little lower.
Note, however, that you cannot go back up to the original death benefit without additional underwriting; once you go down, you cannot reverse it.
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Replacing Your Coverage
The most common option is to simply replace your coverage with a new policy entirely.
- If you’re healthy and young, you may not even experience much of a change in price, especially since life insurance rates have gone down in the past decade, not up.
- If you’ve aged quite a bit since you purchased the maturing policy you will have higher rates, but probably less of a need, so it may be relatively similar once again.
Replacing your maturing term life insurance policy is as simple as getting quotes for a new term policy and applying.
The company who approves you will send a notice of replacement to the other carrier (if they are different), and your new coverage will start as soon as you make your first payment.
Just remember, your financial situation has likely changed over the past 10, 20, or 30 years, so you’ll want to take the time to calculate how much you really need now.
Here are a few scenarios where you might have less need than before:
- No more dependents. Maybe your kids are grown up and out of the house, so you may no longer need to worry about providing for them as much as when they were young.
- Less outstanding debt. If you have paid down your debts over time, you can reduce your death benefit coverage accordingly.
- Lower earning potential. If you have just a few years until you retire, there’s less potential income to replace should something happen to you, assuming you have a spouse who would otherwise miss out on that income.
If you find you need just a few thousand in coverage for burial purposes, you may consider replacing your term life policy with a small burial insurance policy. They generally only go up to $25,000 or $50,000 in coverage, and can be pretty affordable.
On the other hand, if your estate size has risen over the years, and/or you still have quite a few years of high earning potential left, you may actually need more coverage, not less.
Of course, you probably won’t need it for as long, so aim for a lesser duration, like a 5 year or 10 year term.
Canceling Your Coverage
The simplest of all the options, and the one which has no costs involved at all, is to simply let your coverage go.
If you find you no longer have a need for life insurance, you can call the insurance company and request for them to cancel your policy.
Again, just like above, you’ll want to spend a little time just to double check your numbers to make sure you have no needs remaining before you do. Once your policy is canceled, there’s no getting it back.
Consider the following:
- Charitable giving. Maybe you want to pass along a gift to your favorite charity when you pass.
- Estate taxes. If you’ve accrued a larger estate, currently over $5.25 million, you may be liable for estate taxes when you pass.
- Inheritance. If you would want to leave a legacy to loved ones, it may be a great way to create a little leverage.
If these are not on your radar, and you have enough money for any end-of-life expenses, you may be ready to cancel your policy.
Remember What It’s For
As with any financial decision, your life insurance safety net is just a piece of the whole puzzle.
Life insurance is not for you, but rather a selfless way to protect those you love. If you still have dependents or a spouse counting on you, this is just another opportunity to make sure you’ve got them covered.
Author Bio: Jason Fisher is the founder of www.bestliferates.org and is a multi-state licensed life insurance agent who helps people secure coverage nationwide. He has extensive knowledge and experience in complex cases, including estate plans, charitable gifts, and other advanced contracts.