The details of what happens at the end of term life insurance may be different from what you expect. The coverage terminates when the insured person dies, or when the owner cancels – but not at maturity.
Surprisingly, the contract can remain in force indefinitely provided the owner continues making premium payments. Many policies are guaranteed renewable to age 95!
Dying with coverage in force is the primary way to get your money back on term life insurance – with minor exceptions. However, if you outlive the initial contract period, your health status determines whether it is better to renew, buy something new, convert to a cash value plan, or cease payments.
What Happens When You Outlive Coverage
Many people who wonder what happens when you outlive term life insurance do not understand what the contract typically states. For most policies, the term of 10, 20, or 30 years means that the premiums remain level during this defined period.
Most term life contracts are open-ended, meaning the coverage continues as long as the insured has not died, and the owner goes on making on time payments. Only the promise of level premiums expires.
Renew or Extend
One option is to extend your term life insurance after outliving the initial period of level premiums. Many policies are guaranteed renewable to age 95 without evidence of good health, as long as you make payments when due.
Only people whose health has severely deteriorated choose the renewal option because it is often the only choice that they have. Their poor medical record excludes them from buying a new policy at lower rates.
Adverse selection makes extending coverage extremely expensive if you do not die before the end date. Healthy people can find coverage elsewhere by shopping around for lower prices, leaving only the sickest to continue their existing plan.
Pull out a copy of your paperwork and find the premium schedule section. You may find a huge jump in annual rates for extending coverage at the end of the term. For example, a middle-aged male with a 20-year term policy could expect to pay at least fourteen times the previous rate – or higher. Plus, the prices climb sharply after that.
|Year 1||14 X||42 X|
|Year 5||21 X||63 X|
|Year 10||35 X||105 X|
Funding the renewal premiums is often a huge obstacle for people who do not die before the end date and choose to extend out of necessity or opportunity. For example, a male paying $1,000 annually for a $500,000 face value policy could see his costs shoot up by $13,000 to $41,000 overnight!
Consider taking out a personal loan if you do not have the cash on hand to finance such a sudden jolt to your budget. The math could make sense if you know that death is right around the corner. The premiums paid in the past are a sunk cost – the primary way to get your money back is to die with coverage in force (see below).
Following the example noted above, extending payments for two years at the maximum guaranteed rates costs the owner $84,000 but returns $500,000 to the heirs after the insured person passes away. Sorry to be the grim reaper, but somebody has to point out the obvious.
Buying a new term life insurance policy is the preferred option when you outlive your existing coverage because rates will be much lower – if you are eligible. However, you must show evidence of good health to win the best rates and or qualify for new coverage.
Therefore, you must submit to a medical examination and answer detailed questions about your health history to qualify for lower rates. Keep in mind; you are now 10, 20, or 30 years older than before when you completed your initial application. Our wellbeing rarely improves with age.
Request a quote to assess the rates to purchase a new policy – assuming your health is good enough to pass basic underwriting questions.
Converting to a cash value plan is another alternative when you outlive your term life insurance. Many companies will allow owners to convert up to a certain age (75, for example) without evidence of good health.
Once again, the conversion option may appeal most to people with serious medical issues. Expect that the company may charge premiums based on your age at the time you transform the policy to universal or whole coverage. However, from that point forward, the costs should remain in tight ranges without the rapid escalations noted above for extensions.
Allow to Lapse
Allowing the coverage to lapse is the final alternative when you outlive your term life insurance. As noted above, renewing will be absurdly expensive, and buying a more affordable new plan requires evidence of good health. Plus, your needs may have changed over the last 10, 20, or 30 years.
You lapse coverage by stopping the premiums payments. The insurance company will get the hint and close out your account after the grace period expires. Many people choose the lapse option because they no longer need to protect their future income from unexpected death.
- Children are grown and supporting themselves
- Spouse has passed away
- Couples have a sufficient retirement nest egg
Do You Get Your Money Back At the End?
The answer to whether you get money back at the end of term life insurance depends on why the contract is no longer in force, and whether you purchased several optional riders with the policy.
- Accelerated death benefit
- Accidental death
- Return of premium
Face Value at Death
Beneficiaries get their money back on premiums and much more when the insured person dies while the term life insurance remains in force. In this case, the company writes a claim check in the amount of the face value.
The face value of the term life policy means the same thing as the death benefit stated in the contract. The amount of money that your beneficiaries receive can be higher or lower than this figure.
- Optional riders such as accidental death can increase the amount
- Past due payments can reduce what the company disperses
The contract concludes after payment of the face value – with the appropriate adjustments.
Owners can get money back on term life insurance before the end date if a doctor states that the insured person will pass away shortly from a fatal medical condition. The accelerated death is an optional rider that your policy may include.
- The rider advances 75% of the face value if a physician diagnoses you with a terminal illness.
- Terminal illness is a disease that cannot be cured or adequately treated, and that is reasonably expected to result in the death of the patient within a short period.
The contract continues after payment of the accelerated death benefit. However, the agreement expires when the company pays out the remaining 25% of the face amount after the demise of the insured individual with a terminal illness.
A term life insurance policy does not mature like its siblings whole and universal, which feature cash value accumulation. Also, the end date for the guaranteed level premiums does not equal the maturity date – because the phrase does not apply in this context.
Permanent life insurance matures or endows when the cash value equals the face value of the contract – typically at a certain age (95 or 100). Since term coverage does not have cash value, it cannot have a maturity date.
Be careful about the words you use to avoid confusion.
In general, policyholders do not get a refund when they cancel term life insurance because they no longer need or want the coverage. The contract ends when the owner lapses coverage through non-payment beyond the grace period, or by writing a termination letter to the issuing company.
This policy type does not accumulate cash value but could include an optional return of premium rider, which voids when you abandon the coverage before the end date.
Cash Surrender Value
You do not get a refund when you cancel term life insurance because this policy type does not feature cash surrender value. In this case, you get what you pay for: peace of mind in during the time your loved ones rely on your provision – and nothing more.
Affordable monthly costs are the primary reason that people flock to term life policies. Only permanent forms of coverage (whole and universal) include cash surrender value as you pay the much higher premiums over time.
Return of Premium
You do not get a refund when you cancel term life insurance early with a return of premium rider. You must continue the coverage to the end of the contract period to take advantage of this optional feature.
Return of premium contracts cost more each month. But, they refund the total of all money paid into the policy, without interest. It works provided you reach the end of the designated period (10, 20, or 30 years for example) – at full payment status.