When you realize the term policy you purchased many years ago is about to expire, you might panic. You don’t want to take any risks and so you launch into action. You care a lot about your family! The thought of you dying prematurely with little or no life insurance is nightmarish.
What steps do you take? We will show you what pitfalls to avoid in your quest to replace the expiring policy. Also, you will learn about some money-saving options you probably didn’t realize existed.
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A Familiar Story
We just received a call this week from someone who is concerned about their soon-to-expire term life policy. This lady is single and 58 years-old. She purchased a term policy almost 20 years ago and didn’t think much about it. Like many folks, she does not feel good about losing her policy. At the time of purchase, a 20 year term seemed like a very long time. The plan and hope was that her savings would be more than sufficient after 20 years, in case she died prematurely.
Life didn’t play out quite as expected. A couple of financial setbacks caused her to reevaluate. She realized that she needs life insurance for another 10 to 15 years.
This story is not uncommon. We often receive similar calls, but the advice we give varies – depending on each person’s unique situation.
Keeping Your Policy Beyond the Term Period.
This is simply not an option with some term policies. With most term policies, the premium increases more than ten times the level guaranteed premium. For example, a 15 year term policy with Principal Life is guaranteed at $2943 per year during the 15 year period. In year 16, the premium increases to $35,675. By the 20th year, the premium increases to $55,900!
Unless you have a terminal illness, it usually best to consider other options. Keeping the policy in force beyond the guaranteed level period is cost prohibitive.
How is your health?
If your life insurance policy will terminate soon — and you realize you need still need or want coverage – the first thing to think about is your health or changes in your lifestyle. There are three general categories and strategies.
1.Excellent Health / No Changes.
If your health is the same (or better) than when you applied for your current policy, then you have plenty of options. If your health has improved, that’s even better. You might qualify for a better underwriting class. It’s unlikely you will save money. As you get older, life insurance premiums increase.
Strategy: You can shop for new coverage, knowing you will qualify for good rates. Perhaps you need a 10 year or 15 year term. This time, err on the side of caution. If you think you will need coverage for another 10 to 12 years, consider a 15 year term. If you think you will need coverage for another 3 to 5 years, then opt for 10 year term.
5 Year Term Most people don’t realize that very few carriers offer a 5-year term policy. 5 year term policies actually cost MORE than 10 year term policies.
Annual Renewable Term Another option is an annual renewable term (ART), also known as 1 year renewable term. Sometimes, this type of policy makes sense if you know you need coverage in force for only 1 or 2 years. Since the premium increases every year, it usually is more cost effective to buy a 10-year term and drop it after a few years. The cumulative premiums over 3, 4 or more years will be higher with ART.
Laddering Term and Permanent It’s possible that you want to make sure you keep some life insurance in force, even beyond the selected term period. Let’s say that you need a total of $250,000. Perhaps you could purchase a 15 year term for $150,000 and a permanent policy for $100,000. We explain this strategy of laddering term and guaranteed universal life (term to 100) in an article here.
2. Average Health / Slightly Worse
If you’re not quite as healthy as when you applied for your current policy, then you still should be okay. Let’s say you qualified for the “Preferred non-tobacco” rate class 19 years ago. Now, you are a little heavier and take a couple of medications for hypertension and cholesterol. No serious health issues.
In this situation, you should do two things.
- Get quotes as described above in under the first category. Most likely, this will be your best option. Sure, you’ll pay more because of your health status. Perhaps you’ll qualify for Standard or Standard Plus (as opposed to Preferred or Preferred Best), but that’s understandable. You’re now an increased risk to the life insurance company.
- Check with your insurance company to see if your policy is convertible to a permanent policy. You might not want a permanent policy, but it would be good to know. It’s possible the cost to convert your policy to a permanent policy isn’t much more than another term policy. It makes sense to get a conversion quote and learn about your options.
When you convert to a permanent policy, your rate is based on the same health class you qualified for originally. So, if you were approved at Preferred Best and now you are Standard (at best), then this could be a viable option.
Keep in mind, you don’t need to convert all of your coverage. For example, if you have a $500,000 policy, you could convert $150,000 or $200,000 to permanent coverage. More on conversion options in the next category.
3. Poor Health
If you now have a serious health condition, then replacing your current policy can be more challenging. Let’s say you had blockage in an artery and recently had a stent inserted. Even though you may be in good health, life insurance companies see you as a much higher risk. You need to follow the same two steps as the prior category, but conversion can be a more attractive option.
Make sure you have the details of your health condition available. Diagnosis, Date of diagnosis, treatment(s), outcome, current condition, most recent test results, etc. The more detailed, accurate information you share with an agent, the more likely you will receive accurate assessments and quotes.
An experienced agent will ask plenty of questions. If they don’t ask lots of questions, be wary. Sometimes, agents will assume the best and quote you the best possible rate class (based on your condition). It’s best to get accurate rates upfront, even if it takes a little more time.
Check your Conversion Options.
This could be your only option for life insurance if you are declined by other carriers for new coverage. Make sure you find out all the details regarding your option to convert to a permanent policy. Ask if you have more than one type of policy conversion option. Some carriers only offer one universal life policy (that is their weakest policy), reserved just for these conversions.
Carriers know that they must allow conversions regardless of your health status. For this reason, some carriers will only offer one – not so great – universal life policy for conversion. This is why we stress the importance of comparing conversion provisions when shopping for term insurance.
Start the Process Sooner than Later
The average time for a policy to get approved and issued is 5 to 7 weeks. Some agencies that take a proactive approach get policies issued quicker. However, there can be unforeseen delays during the application process. If medical records are requested, this can add anywhere from 1 to 4 weeks (or more) depending on the doctor’s office or the third party they use to store records.
Give yourself plenty of time. If your current policy expires in 3 months, start the process now. You can always push back the effective date to avoid overlap, if necessary.
When Your Term Life Policy Ends (Much Too Soon) Conclusion
Life insurance is primarily about protecting and caring for our loved ones. People often decide to buy a term policy with the idea that their savings will grow and their debts will be paid down. Children will become independent. Many times, this works out fine. Sometime, it doesn’t.
If your term policy is due to expire soon, then it’s wise to consider how your loved ones would be affected if you were to die with no coverage in place. If you want coverage to continue, look into replacement options. Don’t ever cancel your current policy until your new policy has been issued and placed in force.
If you’re not sure what makes the most sense for your situation, seek the advice of an experienced, independent life insurance advisor. We would be glad to help, so please call us anytime for a free consultation.