You were a good spouse and protected your young family and home with a term life insurance policy 20 years ago.
But now that policy is about to expire.
… and you’re thinking, “What happens if you outlive your term life insurance policy?“
That’s a great question, and an important one we hear all the time. Let’s cover the most important considerations for you the consumer.
Quick Article Guide:
- Do You Still Need Coverage?
- Will Your Policy Automatically Expire?
- Reasons You Should Keep Your Policy
- Health Changes
- Retiring With Pension Options
- Buying New Coverage
- Final Expense and Burial Policies
The premise for buying term life insurance is to carry enough coverage to replace the income lost if you die prematurely. When you were the young bread winner, you probably bought enough life insurance to replace 10 to 20 years of your income. If you now have little debt, and enough in savings and assets that your family would be OK if you died tomorrow, you may not need life insurance. You should be able to just let your term policy run its course.
If you’re like most Americans though, you may need to continue to carry coverage for final expenses, outstanding debts, or replacement income.
If you look towards the back of your policy, there’s a table showing your year to year cost – it’s sometimes called a rate or premium illustration. If you bought a 20 year policy, you’ll see a pretty significant price increase in year 21, after your term has expired, and continue to see significant price increases year after year.
If you no longer want the policy beyond the low cost guarantee period, and you are making automated payments, you’ll want to notify the insurance company you wish to cancel the policy at the end of the term. Otherwise, that big price bump could be debited from your checking account without warning. Many people switch to paper check payments in their final year to eliminate that risk.
I’ve had situations where a client found out they had stage 4 cancer or a terminal disease, and only a few months remaining on their term policy. Though the monthly premium was going to double or triple at the end of the term, it made sense for the family to pay the premiums for a year or two to receive the likely death benefit. Remember, proceeds are paid tax free in a lump sum at time of death, and with a long illness and hospital care, there will likely be sizable bills which your family will be responsible for. Debts don’t die with us.
If you are still in fair or better health, buying a new life insurance policy is probably your most affordable option.
One of the most valuable features of a term policy is the ability to “convert” it to permanent life insurance (usually a guaranteed universal life (GUL) policy), for the original or reduced death benefit, with no proof of health. Your policy is only eligible for conversion during the “term” of your policy; once your term has expired, converting your policy is no longer an option. In addition, some companies have cut-off ages for their conversion options, so make sure you do not delay until it’s too late.
Most of us buy life insurance when we’re young and healthy; 20 to 30 years later, we’re likely to have health issues that would make a new life insurance policy cost prohibitive. Some of us may not qualify at all. Yes, unfortunately that beer and pizza eventually catches up with all of us.
When is conversion your best option?
If you have serious or terminal health issues, the guaranteed conversion option for your term could be the best solution. The cost of permanent lifetime coverage is expensive, but you shouldn’t need as much coverage now as you did when you were younger. Some insurance companies will allow you to drop the death benefit to $100,000 or even $50,000 for their policy conversions.
Contact your insurance company to discuss your options now. The rates aren’t guaranteed until you actually make the conversion, however, they should be able to provide illustrations so you’ll have good estimates. Keep in mind once you decide on permanent life insurance, it’s an expense you’re committing to for life…choose an amount which is affordable now and projecting into the future.
One more thing: your policy death benefit doesn’t have to be a round number. You could determine your monthly budget for life insurance (“I can afford $75 a month…how much life insurance will that get me”). Your agent will be able to provide you with an approximation of the amount of insurance you’ll be able to secure without going over your budget.
If you’re nearing retirement, and one of the fortunate few to have fixed pension options, it’s a good idea to review your life insurance alternatives and pension elections now. You’ll have a firm deadline and may need an approved life insurance offer first so you can evaluated more than hypotheticals. Applying for life insurance with any past health issues could take 12 weeks or more before receiving an underwriter’s decision.
Some pensions may only pay you 65% of your maximum benefit if you take an option where your spouse continues to receive payments if you die. It may be better for you to take your full pension, and use that 35% difference to buy life insurance and save/invest the difference. This strategy is commonly referred to as pension maximization.
If your health is below average, that guaranteed conversion option from your term life insurance policy to a Guaranteed Universal (GUL) policy may be be the best way to go. Again, this is available to you, no questions asked. Have your insurance agent or financial adviser review your options. If a new term life policy seems like a viable option, you may want to do a free term life insurance exam to get a firm “offer”. You don’t have to buy it, but you’ll have good idea where you stand in the eyes of an underwriter.
The answer is generally YES, as long as you have income other than social security. If that’s all you have, you’re likely going to qualify for a smaller burial policy.
Otherwise, check with a life insurance agent and ask them to “re-shop” your coverage with multiple companies. Your best rates today will likely come from a different insurance carrier than you originally were with. A good agent will review your health, lifestyle and other risk factors and provide accurate quotes by phone. If you’ve quit smoking, lost significant weight, or otherwise improved your health, your rates could be pretty attractive compared to what you had in the past. Our agents are happy to assist, give us a call toll free: 855-247-9555.
For most of us, the cost of a new policy comes with a bit of sticker shock. The cost of term life insurance has come down over the years, however, you’re older (can’t avoid that!), and insurance companies are looking at our age at the end of a new term (rate guarantee period). If you’re 60, and buying a new 10 year policy, the amount of coverage that you can qualify for now is going to be different.
Insurance companies use income multipliers based on age and income to determine what you currently qualify for. It’s not about how much you want, or your family will buy for you, but the amount of financial loss they would suffer if you died. To put it bluntly, you can’t be worth more dead than alive…..or replace a 72 Pinto with a Rolls Royce…that’s not how insurance works.
Why buy term insurance? It will still give you the best bang for your buck during your financially vulnerable years.
Am I better with a short or long term policy?
This question is answered by what you’re protecting today. Have a few years left on a mortgage, or short term business or private loan? A divorce decree requiring less than 10 years of coverage? A 10-year term will typically be the most affordable short term life insurance policy, and you can easily cancel it once you no longer need it. On the other hand, if you’ve remarried and started over with a young family, a longer term 15 or 20 year term policy could be a better fit.
There are, of course, a number of life insurance types. If you’re considering a new “final expense” or “burial policy”, you’ll need to re-qualify at your current age and health. If you’re in good health, and under age 55, the policies can be affordable. Most states recommend $12,000-$15,000 for final expenses, though more is generally needed.
At age 55, you’ll be looking at around $43 a month for $25,000 coverage for a healthy male; $37 for a healthy female. If age 65, the price is about $71/$59 monthly because the insurance company has 10 fewer years to collect the money and a higher mortality risk to insure. If your health is worse than average (a good life insurance agent will help you figure this out) you’ll be looking at a cost roughly 20% higher and with a 2-year waiting period.
Keep things affordable. Something left behind is better than nothing, and anything is appreciated. Payments should be like your other monthly bills that you can always afford without a financial strain. With final expense or burial policies, you or your family needs to pay to the end, otherwise you’ve thrown that money so make sure your policy is affordable. We also recommend avoiding companies with increasing premiums.
What to Watch Out For…
Companies like AARP will continue to raise your rates every 5 years until the policy becomes un-affordable. If you miss a month or two paying your life insurance premium, your policy will typically lapse. If you’re self disciplined, you’re usually better off setting money aside the money in an account, just in case there are months when you can’t afford to contribute.
If you’re not sure where to begin, give us a call, our agents provide a free, no-pressure, consultative approach to life insurance. We’ll compare dozens of companies in minutes to show you your most affordable options. Toll Free: 855-247-9555.
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