When you bought your term life insurance policy, you were probably thinking about the same thing most people think about when buying life insurance plans: protecting your loved ones. The policy’s death benefit would have given your family a financial cushion if you had died during the term. If you were working and/or raising young kids when you bought the policy, you probably thought about how that death benefit would help replace your income or hire caretakers to fill in for your labor. Ten to 30 years later, your life might look pretty different than it did when you first bought your term life policy.
As you approach the end of the term, deciding what to do about life insurance depends on a lot of factors, including your age, financial picture and family needs. Your financial planners are always the best source of specific guidance around life insurance plans, but here’s a look at your general options for when your term life policy expires.
There are many reasons why you might decide to continue carrying a term life policy after your current term expires. If you’re still in a phase of life where you’re working and/or have family members who are dependent on your care, the policy’s death benefit would still be useful as income replacement.
Term life insurance might also be beneficial if you have any debts that would fall to someone else upon your death. For example, say you still have 10 years left on a business loan that a family member co-signed. Renewing your policy for another 10-year term and naming your co-signer as a beneficiary might give you both peace of mind, knowing that your death benefit can pay off any remaining debt if you die before the loan is repaid. Or, you may want to keep your life insurance because you still have mortgage payments on your home and don’t want to risk your spouse and/or kids losing the home in your absence.
While different term life policies have different provisions, many of these policies are renewable. Your current policy should lay out the terms and rates associated with renewal. You may be able to renew your policy on a year-by-year basis indefinitely and without a medical exam—but your premiums will be dramatically higher once your initial term ends. It’s not uncommon for the annual premium to increase by more than 10x once the policy term ends.
Let’s say you want to maintain life insurance coverage for the next year at least, but the renewal premium on your existing term life policy is just too high. Shopping around for a new policy could yield lower premiums, especially if you’re willing to decrease the size of your death benefit. The challenge with this strategy is that you’ll generally have to pass a medical exam before being approved for the new policy. Chronic or serious health conditions may make you ineligible to be approved for a new policy.
Term life insurance plans are often convertible. However, the specific terms of your policy will affect if, how and when you’re able to turn your term life into a permanent life insurance policy. If your existing policy is close to expiring, it’s possible that you’re already outside the window in which a conversion is allowed. Other policies will allow conversions at the end of the term.
If you check your policy and find that you can convert it to a permanent life insurance policy, you may be able to make the switch without undergoing another medical exam. The downside is that you can expect to pay higher premiums than you paid for your term policy. You’ll also have to pay those premiums for the rest of your life, which might require reworking your retirement budget. However, permanent life insurance plans typically include a cash value component that might prove advantageous if you need to borrow against the value or even withdraw some of that cash.
Depending on how your financial picture and priorities have changed over the years, life insurance might not be a good use of your resources any longer. If you’re debt-free, no one’s dependent on your financial support and you’ve already used estate planning to ensure your heirs will be taken care of, you and your financial advisors might agree that diverting money to your retirement savings or investments makes more sense than spending it on life insurance premiums. Just don’t make the decision to drop life insurance without consulting your financial planners to make sure you’re not overlooking anything.
Sachetta, LLC works with clients on a range of financial planning needs, including insurance. If your term life policy is nearing its expiration date and you’re conflicted about what to do next or have any questions about life insurance plans, we’re here to help. Contact us today.
Stephen P. Ahern, CPA/PFS, CFP®, AEP®, MST provides individual financial, investment, estate and tax planning and small business consulting to a diverse base of clients including key top-level executives, high-net-worth individuals, business owners, venture capitalists, and entrepreneurs. Stephen co-founded and served as President of Wealth Management Advisors, LLC for twenty-one years before joining the Sachetta team.