The details of what happens at the end of term life insurance may be different from what you expect. This coverage type does not have a maturity date or accumulate cash value as with permanent policies.
Insurance companies create term life policies for temporary needs. For instance, parents want to provide for their young children if they die.
Term life policies also have varying periods of level premiums (5, 10, 20, or 30 years) with the option to renew (temporary) or convert (permanent) at sharply higher rates at a designated date.
Consider the pros and cons of four options when your term life insurance policy reaches the end of its term: buying, renewing, lapsing, or converting.
What To Do When Term Life Insurance Expires
A quick lesson in adverse selection and premium pricing can help you decide what to do when your term life insurance policy expires or reaches the end of the level premium period.
- Adverse selection happens when the highest risk individuals purchase coverage because they expect the death benefit to exceed the premiums paid
- Insurance companies charge the highest premiums to the people posing the highest risk of dying while the policy remains in force
Many term life insurance policies are guaranteed renewable, meaning you can keep the coverage through age 95, virtually assuring that your heirs will receive the death benefit – if you are willing to pay the exorbitant prices.
Buying a different policy is often the best thing to do when term life insurance expires when the individual can show evidence of good health. Starting new coverage works in your favor when you fall into a low-risk category given your age.
However, expect to undergo a battery of tests conducted by the underwriting department to qualify for a new policy and get reasonable rates.
- Health history questions
- Body mass index (height and weight)
- Medical exams
- Blood tests
- Stool samples
- Attending physician statement
- Motor vehicle reports
- Consumer inspection report
Many people decide that allowing the coverage to lapse is best when their term life insurance expires. For instance, new parents might have purchased a 30-year policy when their children were first born, giving them peace of mind while they were still dependent.
Once children graduate from college and leave the nest, the need for life insurance is greatly diminished. Therefore, lapsing the coverage can make great sense, freeing up money for retirement savings or home improvement projects.
Renewing the policy is the best course when term life insurance expires when the person’s health has deteriorated. You do not have to show evidence of insurability as the option is often guaranteed renewable.
Adverse selection makes renewing your term life insurance policy at the end of the level period extremely expensive because only the sickest people choose this option – driving up claims. Expect costs to skyrocket when taking advantage of the guaranteed renewable feature.
For instance, the article author has a policy listing the annual renewal premiums after the expiration of the 20-year level period at age 65. This chart depicts the relative costs to renew each year compared to the previous rates.
Sample Annual Renewal Rates
|Year 1||14 X||42 X|
|Year 5||21 X||63 X|
|Year 10||35 X||105 X|
Converting to a permanent policy type (whole or universal) is the best thing to do when a term life insurance policy expires when you need to cover funeral expenses or pass a legacy on to your heirs.
Many term life policies include a conversion option that continues through age 65 or 75 or up to the end of the level premium period, whichever comes first – converting means that you exchange the contract for a permanent cash value policy without evidence of insurability.
Permanent life insurance can remain in force until you die, or the policy endows (matures) without sharp increases in the monthly premiums.
What Happens When Term Life Insurance Matures?
A term life insurance policy does not mature; it lapses, renews, or converts. The coverage owner determines what happens next as they control the process in most guaranteed renewable contracts.
A quick primer on industry legal definitions can eliminate confusion and help you decide what to do when your term life insurance reaches the end of the level premium period.
A term life insurance policy does not mature upon the endowment of the contract. Endowment means the cash value equals the death benefit, and term policies do not accumulate cash value as with other types of permanent coverage (universal and whole).
The typical legal definitions connected with cash value policies do not apply. For instance, you will not find this language in your contract.
“On the policy anniversary following the insured’s 100th birthday (the maturity date), the policy will endow and pay the cash surrender value on the maturity date to the policy owner. At that date, all coverage under the policy ends.”
The term life insurance maturity date is a meaningless phrase. The policy does not endow or accumulate cash value. However, two other dates are critical for you to understand when deciding what to do when the policy expires.
- Renewal Date: the contract moves from level premiums for a set period (5, 10, 20, or 30 years) to sharply higher yearly rates without evidence of insurability
- Conversion Date: allows you to exchange the contract for a permanent cash value policy without evidence of insurability