Is term life insurance part of your retirement planning? If it is, do you know what happens when it expires? A term life insurance policy is designed to last for a specific duration called term. Term refers to a fixed number of years or ends when you reach a certain age.
You will keep paying a premium amount to the insurance company you obtained the policy from until your term expires. When your term ends, your policy expires, and you no longer need to pay premiums. Your insurance company, depending on your age (starts at 65 years), will offer you a 10, 20, or 30-year term.
However, there are a few insurance companies that will allow you to select the term. If they do, you can select a life insurance coverage term that meets your needs.
How Does Term Life Insurance Work?
A term life insurance policy is a contract between you and the insurance company. In the event you pass away before the term’s completion, the insurance company will pay an amount to your beneficiaries. Insurance companies use actuarial or statistical methods to determine the risk involved in providing coverage to the applicant’s beneficiaries. Some of the factors your insurance company will consider when determining the amount include your life expectancy, based on your current age and your medical profile compared to others, along with assumptions about future expenses and interest rates.
Since the insurance company is taking the risk of offering you coverage, they will ask you to pay a premium each month.
When Should You Buy a Term Life Insurance Policy?
You can consider buying a term life insurance policy if the following applies to your situation:
- You have a mortgage on your home, and you want your family to have enough money to pay it off in the event you pass away.
- You have young children who you need to provide for.
- You plan to retire and only require insurance for the duration you expect to work.
What Should You Do If Your Term Life Insurance Policy Expires?
If your term life insurance policy expires, you have two options:
- Let it expire OR
- Let it expire and renew it at a higher cost premium
If you do not want to pay a higher premium on renewal, see if you can convert your existing term life insurance policy to a permanent life insurance policy. However, if you plan to convert it, do it before your current insurance policy expires. The best time to convert it to permanent life insurance is between one and five years before your current policy expires.
Renewable or Convertible Term Life Insurance Policy: Which is Better?
A renewable term life insurance policy is automatically renewed upon the expiration of the term. If you have opted for a 10-year coverage, your insurance company will renew it for another 10 years, after your term ends. However, your premiums will increase if renewed.
On the other hand, a convertible life insurance policy allows you to convert your current policy to permanent life insurance. The main benefit of having a convertible life insurance policy is that you will not have to pass a medical exam to qualify for it.
If you have opted for convertible term life insurance and get diagnosed with a grave illness, consider converting to a permanent life insurance policy. You can discuss your options with a retirement planning professional if your term life insurance policy is nearing expiration.
They can guide you in choosing an option, according to your financial situation and personal circumstances. It is advised to talk to a professional because they can help you get the best and affordable insurance coverage. You do not want to select the wrong coverage and regret it later; hence, it is better to play it safe from the start.
Overview of a Term Life Insurance Policy
The benefits of a term life insurance policy include:
- Easy to understand
- Costs less because it covers you for a short duration
- Use it for multiple purposes (mortgage, dependents, children’s education, and more)
- Renew it for another term or convert it to permanent life insurance
You can cancel your term life insurance policy by not paying any premium if you want. You will not get your money returned to you if you cancel your coverage. Since it is highly customizable, people considering retirement planning should seek the assistance of a professional to discuss whether they should get renewable term life insurance or convertible term life insurance, based on their circumstances.