Weighing Your Insurance Options
Outliving your term life insurance can be considered good news. We want to live for as long as comfortably possible.
But it also brings forth the dilemma of considering whether to forego life insurance or not. If your dependents are now self-sufficient and your own retirement plans are in place, then you can simply let your policy expire upon maturity.
But if this is not the case, you need to consider new coverage. The best option for a relatively healthy person is buying a brand new policy to keep the cost of premiums as low as possible. If a medical condition makes a new policy difficult or unaffordable, then take advantage of the guaranteed riders in your initial policy. Most importantly, speak with an experienced insurance advisor to explore all your option and see where you can save money while maintaining the coverage you need.
The information and views provided herein is for general informational purposes only and should not be considered legal or financial advice.
Looking For Life Insurance Advice
Were not financial advisors, but we are regulated by the FCA. Our FCA status means that whilst we cant advise you what to buy, or which insurance is right for you, we can give you as much information as possible to make your own decisions on which product may or may not be best for you. If youve any questions you can always chat to our Honchos, theyre here and happy to help.
What Happens To The Life Insurance Premiums You Paid
Once the term is up on most types of term policies , you do not get back the premiums youve paid. Thats why level term life insurance is so affordable. Much like your auto, pet or renters insurance, you pay the premiums and hope youll never need to use it.
There are term policies out there called return of premium that may seem like an attractive option because you get back the premiums youve paid. However, these types of policies cost much more than your typical level term policy. Confusing? Yes, we agree. For example, a 35-year-old man can buy a 30-year, $500,000 Haven Term policy issued by MassMutual starting at about $41 per month. A return of premium policy for the same man and the same amount of coverage would cost about $120 per month, according to State Farm.
Not only does this higher premium mean less money in your pocket each month, its also returned to you at no interest.Naysayers proclaim its extra money of yours that is given to an insurer to hold onto and invest for its own gains. Advocates say its better than nothing and can serve as forced savings.
We say: Buy the more affordable term life insurance coverage and use the difference to build an emergency fund or grow wealth.
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Calculating Level Term Premium Its A Simple Average
To determine your level premium, life insurance companies add up the payments for each year in the 10 year term and divide it by 10.
Mostly, 10 year level term life insurance is the average premium for the first 10 years of coverage.
From year 11 up, or in the case above, from ages 50 95, it reverts to an annual renewable policy.
Its essential to lock in for as long of a level term as you think you might need for coverage. In a nutshell, once the level term is up, your premiums will skyrocket.
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What Can You Do With A Term Life Policy
One of the great things about term life insurance is that it gives your beneficiaries financial flexibility. They can use the payout for any financial priority, whether its paying routine living expenses or funding college tuition.
Life insurance types such as credit life insurance and mortgage life insurance give your family no flexibility because the life insurance payout goes to the lender or creditor, not beneficiaries you choose.
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Hindsights 20/20 I Have A Short
So youre reaching the end of your life insurance policys term and just want to know your options.
The most obvious option is simply buying a new term life insurance policy. Of course, youll need to re-apply and go through the process all over again but it will almost always be a cheaper option than paying the premiums on your current policy after your term has run out.
Like I mentioned earlier, your premiums wont be as friendly as they could be, but almost always the best option.
Convert To A Permanent Policy
Your term policy may also include a provision for converting to a whole life or universal life policy, again without a physical exam. The new insurance policy could continue for the rest of your life or for as long as you need it. The premium on your new policy will be higher than you have been paying for term insurance, but you may have the option of converting to a policy with a smaller death benefit in return for a lower premium if that works best for you.
Policies differ in terms of when you can make this switch , so youll need to check your policy or get in touch with your insurance company or agent to find out.
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What Are The Advantages Of Purchasing Life Insurance Through Work
Getting life insurance through work can be an easy way to protect your family. If your employer offers a group plan, consider signing up for advantages that may include:
- Competitive group rates
- Guaranteed issue, meaning you can get a certain amount of coverage without answering health questions or taking a medical exam
- Convenient payroll deductions
- Easy access to enrollment and educational tools that can help you make decisions about the type and amount of insurance thats right for you
- The confidence of knowing that your employer has reviewed and selected the plan
All you have to do is sign up, and sometimes enrollment is automatic.
Purchase A New Term Policy
For the relatively young who are in good health, the most inexpensive life insurance option might be to purchase a new term policy. Premium costs may also go down if a much lower death benefit and a shorter term are purchased, which may be a good option for people who need less coverage than when they purchased their initial term policy.
For example, for someone whose youngest child is still in high school when their 20-year term policy expires, an additional ten-year policy may be sufficient to ensure that their dependent has completed college and no longer needs financial support from the estate.
Keep in mind that a medical exam will likely be part of the underwriting process for any new term policy, and if there are new health issues since the first policy, the rate will likely increase. Age is also a factor older people pay more for their life insurance policies.
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This Is A Great Option If You Have Health Issues
If someone has developed health issues and can no longer qualify for traditional life insurance and theyre within their conversion period, this is typically the best route.
The process to explore a term life conversion is to contact your initial agent and let them know you want to explore converting your life insurance policy. Theyll let you know your options.
If you dont have contact with your agent, contact us and well let you know what your conversion options are.
A good rule of thumb is if youre under the age of 65, you likely have a conversion option.
How To Convert Term Life Insurance Into Permanent Life Insurance
Most term life insurance policies come with a built-in term conversion rider, which gives you the ability to convert your policy to a permanent policy when the term expires. Ask your provider if youâre unsure if your policy includes the rider.
The main advantage of a term conversion is that you wonât have to go through the underwriting process again. You’ll skip themedical exam and keep your original insurance classification even if your health has worsened.
Youâll also avoid the higher term life premiums for older applicants. A $500,000, 20-year policy costs around $30per month for a healthy 35-year-old male. A healthy 55-year-old male will pay $150per month for the same coverage.
However, permanent insurance is 5 to 15 times more expensive than term coverage. Your provider may offer a term conversion credit to lower your payments for the first year, but youâll only see reduced costs in the short term.
If you decide to take advantage of the term conversion rider, youâll need to make this change while your policy is active. Make sure to begin the process in the final year of your term to avoid missing out.
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Buy A New Term Policy
Term insurance prices have dropped over the past 20 years because of competition, the ease of comparing rates online, and medical advances that have led to longer life spans. You may be able to get a new policy that locks in a rate for 10 years or more and doesnt cost much more than your current coverage. For example, a healthy 57-year-old man could buy a 10-year term policy that would provide $500,000 in coverage for about $1,151 a year. Or he could buy a 20-year term policy for about $2,050 a year, says Udell.
Hilary and David Graf bought 20-year term policies when they had their first childand then they had five more kids. When their policies were about to expire five years ago, they were supporting most of their kids, who ranged in age from 15 to 22.
As a personal finance teacher at a high school near Richmond, Va., Hilary understood the importance of life insurance, and the couple started shopping for new policies. We realized we were grossly underinsured, she says. The Grafs worked with AccuQuote and found a Transamerica term policy with living benefits that would let them access cash from the death benefit early for certain medical conditions. Hilary bought a $750,000 20-year policy for about $1,600 a year, and David bought a similar policy for about $1,800 per year. You dont think youre going to need it, but if something happens, youre covered, she says.
How Do You Renew A Term Life Policy
Regardless of the term life insurance policy length selected, it is important to make sure it contains a guaranteed renewable provision. A term life insurance policys renewability provision is arguably its most important feature.
The provision allows the policy owner to renew the policy at the end of the policy term, without proving evidence of insurability again . This can be done annually, typically up to age 95 or so .
The obvious advantage of the renewability provision is the policy can be extended, even if the insured is in poor health. Suppose you, as the insured, have been diagnosed with a serious medical condition during the term of your policy.
When the policy expires, you may no longer be insurable which is to say you could not be approved for a new policy. However, you may still need the coverage.
Perhaps you originally chose a 10-year term, but now you need a 20-year term due to the birth of another child. The renewability provision would allow you to extend the coverage despite your current medical condition.
The primary disadvantage of extending the policy beyond the original policy term is the cost. Once the policy term ends, the guaranteed or level premium rate you have been paying ends as well.
There is little doubt the insurance company will charge a higher premium each year you choose to renew the policy beyond the original policy term. Most term life policies list the current and maximum renewal premiums in the policy.
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Other Life Insurance Options
The main types of life insurance are term life, whole life and universal life. And within each of those types are further varieties. With so many life insurance options, you can likely find a policy that fits your life insurance goals.
The array of choices can seem overwhelming at first, but keeping a focus on the reasons you need life insurance will help you pinpoint the right type.
Can you define the amount and end of the financial obligation you want to cover? For example, this could be the amount you expect to earn until the year you plan to retire. Term life is the best option for specific amounts like this.
Does the financial obligation stretch indefinitely? For example, using life insurance to fund a trust for a special needs child requires lifelong coverage. Permanent life insurance is right for these situations.
Do you need life insurance for burial expenses? If your family will need funds for funeral costs, youll need a permanent life insurance policy that wont expire like term life. There are even special policies designed as burial insurance that have low amounts of coverage and are suited for small budgets.
What Is The Difference Between Term Life And Whole Life Insurance
Term life insurance occurs over a predetermined period of time, typically between 10 and 30 years. Term policies may be renewed after they end, with premiums recalculated according to the holders age, life expectancy, and health. By contrast, whole life insurance covers the entire life of the holder. Unlike a term life policy, whole life insurance includes a savings component, where the cash value of the contract accumulates for the holder. Here, the holder can withdraw or borrow against the savings portion of their policy, where it can serve as a source of equity.
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Choosing A Term Life Insurance Company
Its a good idea to compare life insurance quotes to start your life insurance shopping journey. You may be tempted to focus solely on cost when youre choosing an insurer. The best term life insurance companies will offer benefits that give flexibility at a good price.
Are there living benefits? These allow you to access your own death benefit in cases of severe illness. You can use the money to pay for medical expenses, or anything else.
Is the policy guaranteed to be renewable? This allows you to renew the policy once the level term period runs out. It can be useful if you reach the end of the level term period and still need life insurance but have health problems.
Can you convert the term policy to a permanent policy? This allows you to switch to a permanent life insurance policy. But theres usually a deadline for doing it, so make sure you know your time window for converting.
Can you change the policy face amount? If your life insurance needs change in the future, can you adjust your coverage amount? Usually you can only adjust downward.
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Where Does Your Money Go
When you pay your life insurance premiums, youre essentially sending your money to a metaphorical bucket that is handled by your insurers. When your insurance company needs to payout to a family, they will take it from that bucket.Therefore, if you pass away during your agreed term, then the insurer will go into the bucket which others have been paying into and payout to your beneficiaries.
Combine Several Smaller Policies
If you have health issues that make it difficult for you to buy a sufficiently large term insurance policy, you may still be able to cobble together a portfolio of smaller policies that will add up to what you need. These policies may not require a physical exam, but they may ask for some health information.
In addition to buying one or more small policies through an insurance agent or directly from insurance companies, you could be eligible for group life insurance through your employer, if youre still working, or through a trade association, college alumni club, or other organization to which you belong.
Some insurance companies submit your name to a company called MIB Group, which reports back the number and coverage amount for other policies you have. If the insurer believes you are applying for more insurance than you would reasonably need, it may deny coverage.
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What If I Decide Against Life Insurance Coverage If I Outlive My Current Policy
If youre fortunate enough to not require any more insurance coverage, then all you need to do is pay the last premium and wait out the policy. Once the plan ends, you wont be covered and nor will your beneficiaries receive any payout upon your death. Of course, that means you no longer need to pay your monthly premium as well.
If your children are well on their way to providing for themselves, youre completely debt-free, and your partner is capable of maintaining their expenses without your income it doesnt make much sense to continue paying for a term policy you may not need.
But letting your coverage lapse entirely is not the advised course of action for most policyholders if you still have obligations including those listed above and have not saved up the cash to cover them at that time.