Although term coverage is usually bought with the assumption that any dependents will be fully grown and financially independent by the time it expires, that is not what always happens.
Normally, when term life insurance expires, nothing happens. The insurance carrier simply sends a notice to the policyholder that the policy is no longer active and that the policyholder should stop the premium payments, there is no death benefit either. Whereas, if it were a return-of-premium policy, then a check would be sent for the amount paid into the policy during its term.
The exception for this is if the policyholder has a term conversion rider on the policy. This allows the insured to change the term policy to a permanent insurance policy when the term ends without having to start the underwriting process again. This is a great option for people that need coverage as a result of a medical condition but do not wish to have a medical exam.
Purchasing coverage after you outlive your term life insurance
The people who need further coverage after a term policy ends should think about starting the process and choosing the best option at least six months to a year before the policy expires.
Here are a few options to consider after you outlive the term of your life insurance policy:
As mentioned above, there are a few policies that allow term conversion at the end of the policy’s term. This allows the policyholder to switch to permanent status as outlined in the policy documents. It does result in increased rates but allows policyholders to maintain the same coverage as before. In many cases, converting may be a cheaper option than purchasing a new policy.
Purchase a new term policy
Relatively young people that are in good health should consider purchasing the inexpensive option of a term policy. Costs may also decrease if a lower death benefit and a shorter time period is chosen, which is a great option for those whose needs have altered since purchasing the initial term policy.
Bear in mind that the policyholder will have to submit to a medical exam as part of the underwriting process for the new term policy, as if there are any new health complications after the first policy, the premium rates will be more. Age is also a contributing factor and the older you are, the higher the insurance premiums will be.
Purchase a permanent policy
One option to consider for people who do not possess a term conversion rider on their existing policy is to simply purchase a better permanent form of life insurance after the initial policy expires. It is crucial to remember that permanent policies like whole life insurance are significantly costlier than term life insurance.
The advantage is that permanent policy remains valid until the death of the policyholder as long as the premiums are paid. Permanent policies also generate a tax-deferred cash value. A portion of the premium is set aside in a savings vehicle where it grows and can be utilized as a loan when needed. Although the cash value portion will not earn as much interest as other investments do, it is a safer option and plays a key role in financial planning.
Insurance experts do not recommend permanent policies for everyone, usually due to their cost but for certain individuals, these policies may make the most sense. For example, permanent policies are a good option for someone while disabled children that may never be financially independent or a non-working partner that would require help in maintaining their lifestyle should the working partner pass away.
Final expenses insurance
For individuals that do not want to burden their heirs with funeral expenses and do not need a significant death benefit, final expenses or burial permanent insurance may be the right choice. This kind of permanent policy takes care of any funeral costs and outstanding debts and tends to be quite moderately priced but usually offers a low payout – around $25,000.
But unlike most permanent insurance policies, it does not require a medical exam. It is a good option for older adults that wish to prevent their beneficiaries from experiencing financial challenges associated with their death.