Let’s say you have a 10 year level term life insurance policy.
What happens after the 10 years is up?
Do you lose your life insurance coverage?
Most people assume that if they have a “10 year term policy” or “20 year term policy” that their coverage ends at the end of the term. In most cases, this is not true.
Myth – Term Life Insurance “Expires” when Initial Term Ends
Most term life insurance policies actually cover you to age 95.
At the end of your initial term, most term policies do not expire. However, the premiums will increase on an annual basis, in most cases, to an astronomical amount.
There are a few carriers, such as Lincoln, whose renewal premiums are not too outrageous. You’ll need to wait for your first renewal premium notice to know for sure what your new premium will be.
Why Do Premiums Increase after the Initial Level Premium Period?
When you buy a life insurance policy, let’s say at age 40, you could buy an annual renewable policy, which goes up every year since you’re older and for insurance purposes, are just a little riskier to insure. So annual renewable life insurance policies are available, but they’re not very popular since the premiums go up every year.
Your premiums for a $1,000,000 male non-smoker might be $250 for the first year. Then $265 in year 2, $275 in year 3, and so on, until 10 years later when you’ll pay about $450 for the coverage. This is an example of annual renewable life insurance.
Since most people would rather plan their budget around fixed expenses, many insurance carriers offer level term life insurance policies. In essence, they’ll still cover you until age 95, but for a fixed term, say 10 years, or 15, 20, or 30 years, your premium (payment) is fixed.
Calculating Level Term Premium – It’s a Simple Average
In the example above for 10 year term life insurance, they would add up the premium for each of the first 10 years and divide it by 10, and that would be your premium for the first 10 years. So essentially, 10 year level term life insurance just charges you an average premium for your first 10 years you’ll be covered. Then in years 11 and up, or in the case above, from ages 50 to 95, it reverts to annual renewable insurance coverage.
If you can understand that, then you’ll see the importance of locking in as long of a level term as you think you might possibly need coverage, because once the level term is up, your premiums will skyrocket, and eventually become unaffordable.
What to do if my Term Policy is about to “Expire”
If you have a policy whose initial term period is almost up, you have several options with most policies.
- Replace the Policy for a cheaper one – If you’re still healthy enough to get a new policy, you might consider applying for a new term or permanent policy. It will most likely cost a fraction of the renewal premium of your current term policy.
- Convert the Policy – Check the policy’s conversion features. You may be able to convert the policy to a permanent policy without evidence of good health. If your health has diminished since the term policy was issued, this may be a good option for you. See notes on term policy conversion here.
- Pay the Renewal Premium – If you can’t afford to convert your policy or replace it, you might consider paying the renewal premium. You’ll have to take your health and estimated life expectancy into account here, as well as how long you still need the coverage. If you need it for several more years and you’re still healthy, it’s probably best to bite the bullet and buy a new policy.
- Decrease your Death Benefit – Many companies will allow a one-time decrease in face value to your policy, which will reduce your premiums.
- Let your Policy Lapse – If none of the above are valid options for you, and you can either no longer afford your policy or no longer need your policy, simply stop paying premiums and the policy will lapse.
Other Resources you want to read:
I’ve written a couple other articles on this site you will want to read before deciding on whether to replace your policy or convert it.