A term life insurance policy, as the name implies, lasts for a specified period of time – the term of the policy.  If you purchase a 10-year term policy, your beneficiaries would receive the death benefit if you were to die within the 10-year term of that policy.  The same would be true of a 20 or 30 year term policy, in which case the death benefit would be paid if you were to die during the 20 or 30 year terms of those policies.

Many people don’t think about what will happen to their life insurance policy once their 10-, 20-, or 30-year term is up. At the end of a term, your insurance needs have most likely changed. It’s possible that your children are now adults and don’t need your financial support, but your spouse may be approaching retirement. An expiring term does not eliminate the need for life insurance. So what should you do when your term policy comes to an end? We offer the following suggestions:So, what happens at the end the term, you ask?

Renew the Policy

With most companies, you can renew your existing term-level coverage without a medical exam or questionnaire. The trade-off for this renewal is usually significantly higher premiums that increase annually. This might be the best option for individuals in poor health who may not qualify for a new policy.  I get (often frantic) calls daily from people who have recently received renewal notices at the end of their policies’ term periods, in total disbelief at how much the premium is going up.  That is certainly an option, but we advise against doing this in most cases.

Purchase a new term policy

If you are in relatively good health, consider shopping around for a new life insurance policy. Due to the fact that many people are living longer, premiums are relatively inexpensive. You will most likely get a better deal on a new life insurance policy than you would renewing your old one.

Return-of-premium option

If you chose to pay for a return-of-premium rider on your expiring policy, at the end of your term, you are now eligible to have your premium payments refunded. Another option is to take the “paid-up option,” which provides you with a policy which is paid up by the returned premium.  The death benefit will be considerably lower than your expiring policy.  It is important to consider that premiums are significantly more expensive under this provision, so you may want to skip it for your next term policy.

Conversion

Many term policies have a conversion option, which allows you to convert the policy into a permanent policy (usually universal life) at the same health class you were originally approved for the expiring term policy.  The conversion period varies with the length of the policy and your age.  However, most policies allow you to convert until the end of the term.  The benefit of this option is that it allows you to convert to a permanent policy at the same health class you were assigned for your term policy.  This is great for those whose health has declined since purchasing their term policy and have a need for lifetime coverage. The premiums are considerably more than the term policy because they will be guaranteed for life.

Purchasing a 30-year term policy vs. purchasing a 10-year term policy every 10 years

We always recommend purchasing the longest term policy that fits your budget, unless you have a shorter need for specific purposes (e.g. key person insurance).  By doing this, you will lock in your current health class until the end of the term, rather than purchasing a new policy more frequently, risking higher premiums due to negative changes in your health.

There isn’t a great difference in price if you purchase a 30-year policy or renew a 10 year policy twice (it varies based on age and health class), provided your health doesn’t change.  I ran some quotes for a 35-year old male for a $500,000 term policy.  I quoted both a 30-year term and a 10-year term, renewed twice.  For a male in the best health class, purchasing a 10-year term policy every 10 years (to age 65) was actually a bit less expensive over the thirty years than the 30-year term (about a $600 difference over the 30 years).  When I ran the same numbers for the Preferred Health Class, the 30-year option was approximately $2,000 less than the 10-year option.  Again, it depends on one’s age and health class when the policy is purchased.

However, who can predict what their health will be in 10, 20 or 30 years?  Will a healthy 35-year old male be in the same health at age 55, when the last of the three 10-year policies needs to be purchased?  Most of us have changes in health as we get older, so by locking in rates at a younger age takes the risk out of the equation (it actually transfers the risk from you to the insurance company).