If you purchased a term life policy several years ago and its term life policy is now coming up for renewal, your family’s needs may have altered since. Although annual renewal options exist, premiums tend to increase each year.
Assuming your contract will soon expire, it would be wise to start considering all available options as early as possible.
Renew
Many people purchase term life insurance to provide their family with financial security in case of their sudden demise, but as time progresses they may still need coverage due to ongoing commitments such as mortgage payments or raising children who require extra protection. When their policy expires they must make the choice between renewing it, switching over to permanent coverage or purchasing a whole new policy altogether.
Term life policies typically feature an option to convert their death benefit to permanent coverage without going through a medical exam, enabling you to keep the same coverage and premiums when their term ends. Permanent policies like whole and universal life offer lifetime coverage and accumulate cash value over time while offering lower premiums than term policies.
If you decide to convert your policy, the ideal time and place to do it would be during its final year of term. That gives you plenty of time to investigate various options before making a final decision.
Renewing a term life insurance policy can be the simplest and least-expensive solution when its end date arrives, however this also means your rate could increase depending on your current age – potentially tripling or even quadrupling the premium!
Applying for a new policy requires going through a medical exam and underwriting process, which could prove more complex than simply converting an existing policy, given that your health may have changed since you initially applied. If this option appeals to you, start shopping around six months prior to the expiration of your current policy so that there’s enough time for application and underwriting processes and no gaps exist between policies. As part of your future financial obligations, such as raising children or paying off a mortgage, it’s wise to have some type of life insurance in place – raising children can be expensive and repaying mortgages can require large sums of coverage in the form of life insurance policies. Therefore, it’s a wise idea to always maintain some level of coverage through life insurance.
Convert
Many term life policies feature an option called a conversion rider that enables you to convert to permanent (whole or universal) life insurance without taking another medical exam. Conversion may be especially appealing for those requiring coverage beyond their term’s end or have health issues which make obtaining new policies difficult, though you should carefully consider your objectives before opting for conversion; since permanent policies tend to cost more, you will need to assess if their premium increases will cover your retirement goals adequately.
If you decide to convert, it’s important to carefully review the terms of your contract in terms of specific deadlines and requirements. Some insurers allow limited conversions each year while others may require you to wait some years before you can convert again. Before making this decision, it is wise to talk with an agent in order to ensure you understand both its advantages and disadvantages before making your final decision.
Some individuals find permanent life insurance is best suited to meeting their long-term needs, particularly if they are young and healthy when purchasing one. Permanent life policies may also prove useful for parents looking to ensure their children will become financially independent by adulthood or older people with high net worth who want a way to safeguard their assets for life.
If you want to switch from term life coverage to permanent coverage but you’re uncertain whether the additional premiums can be afforded, partial conversion may be the way forward. This involves switching out only part of your term life policy into permanent coverage at one time – usually 20 percent or less at first – which can help reach your goals more quickly with term life coverage. Laddering into permanent coverage can be seen as an effective strategy in reaching them quickly.
Buy a New Policy
If you do not wish for your policy to lapse and leave loved ones without coverage, purchasing another policy is key to keeping their death benefit intact. There are various options available that may allow you to keep this important protection.
Some term life policies automatically renew at the end of their terms, although you will likely need to take a medical exam prior to doing so. Unfortunately, due to being older and taking on more risk, premium rates for such policies tend to be much higher – rendering this option uneconomical if long-term coverage for mortgage or debt payments are necessary.
Consider switching your term life policy over to permanent coverage at the end of its term. Many companies provide this option and it should usually be possible without needing another medical exam or answering health questions again. But be sure to start this process early – some experts advise starting six to 12 months prior to policy renewal date!
Purchase of new term life insurance policies requires going through a medical exam and answering health-related questions, but could be worth exploring if your needs have changed since originally purchasing term coverage. With rates near their 20-year low level1, purchasing another policy could help secure competitive rates while giving you coverage you need.
Before considering your options for an extension, conversion or purchase, or new term life policy purchase it’s wise to consult your financial advisor for tailored advice based on your personal needs, obligations and long-term goals.
Cancel
If you are considering canceling your term life policy after its expiration, it is wise to carefully consider your options before doing so. While your current death benefit might still cover your financial obligations or expenses, alternative plans such as renewing it or switching over to whole life insurance could provide better solutions – as can taking out new coverage altogether.
Contrary to other policies, term life policies allow you to cancel anytime prior to their expiration without incurring cancellation or surrender fees. Simply contact your insurer and request the termination; some companies provide termination forms while others send notices via the mail – either way you should ask them for written confirmation of your cancellation date as well as any premium refund owing if applicable.
As well as considering whether you need coverage when your term life insurance expires, it is also prudent to shop for new policies well in advance of their expiration. This allows enough time to evaluate different offerings and assess the amount of coverage necessary. Plus, underwriting processes typically take at least two months!
Cancelling a term life insurance policy is relatively easy, but it’s wise to review all available options prior to making a decision. You could still purchase another term policy at an affordable rate or convert your old policy into a whole life policy with benefits lasting throughout your life – or use the death benefit from your existing policy to cover burial costs.
However, cancelling a whole life insurance policy with built-up cash value could have tax repercussions. The IRS considers any money received as taxable income in your first year after cancellation; for best advice or guidance in making this decision consult your accountant or agent first.