What should you do when your term life insurance policy ends?

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What should you do when your term life insurance policy ends?

It finally happened: You made it to the end of your term life insurance policy.

It’s sort of bittersweet, isn’t it? You’ve come a long way with your policy. You diligently did your research, you compared a bunch of life insurance quotes, you picked out the perfect policy with the perfect carrier, and you went on with your life – 10, 20, maybe 30 years – knowing that you had a safety net in place for your family. You’ve gone through births, graduations, weddings, and maybe even more births when grandchildren join the family.

And now it’s over.

I mean, don’t get me wrong, you’re still alive, so that’s great. But you have a big decision to make, like...what now?

Depending on your age and where you are, financially speaking, you may still need insurance coverage. Here are four options you should consider when the final bell has rung for your term life insurance policy, ranked from best to worst.

Self-insurance

You’ve been a diligent saver, segmenting your savings into specific buckets for things like retirement and emergency funds. Before you look to apply for a new policy, see if you have the option to self-insure now. That basically means not relying on any form of life insurance – if you were to die, your family’s financial obligations would be covered by whatever savings and assets you already have.

How is this possible? If you’ve done your due diligence over the years (or no longer have as many dependents relying on your salary to secure their future goals), you’ll be in a place where your assets outweigh your coverage needs. Your coverage is shaped like a bell curve: When you’re young you have few financial obligations and expenses, but those grow as you have kids and buy a home. Then, when you’re older – and when your term life insurance policy is expiring – you’ve paid off a lot of your debt and have fewer dependents, so your coverage needs have dropped.

During this time, you’ve also been growing your wealth. (Big props to younger you!) Whether it’s a retirement account like an IRA or a workplace 401(k), or just investing with a bank or robo-advisor, the goal is to have enough money in place where paying premiums is a thing of the past.

Convert your term policy to a whole policy

We’re big fans of term life insurance, for good reason. Whole life insurance has its place for people who can afford the high premiums (up to four time the cost of term life insurance – yikes!) and have complex financial needs. But for 80-90% of people, term life insurance is what they need during their prime money-making years.

But term life insurance – by design – ends. Whole life insurance doesn’t. That means that, with a whole life insurance policy, you can keep the policy in-force as long as you pay your premiums.

If you want to go this route, good news: Your insurance carrier also wants you to. Most term life insurance policies come with a conversion rider that magically transforms your term policy into a whole policy. Since your term policy is likely expiring when you’re more mature in years, and life insurance gets more expensive the older you are – 8% to 10% year over year, on average – the main draw here is that you don’t have to go through the underwriting process again or prove your insurability so there’s no risk of getting turned down. All you have to do is start paying premiums again, for as long as you need the coverage.

However, don’t expect your new policy to come at the same cost as your expired term policy. Since your new whole life premium will be based on the age at which you’re converting your policy, and whole life insurance can be up to four times as expensive as term life insurance as is, it’s likely worth looking at the price difference between a whole and term policy before starting to pay into a new whole policy.

Buy a new term life insurance policy

Were you a huge fan of your old term life insurance policy? So much so that you decide that you’ll just buy another one?

Well, you can! If you want to get another term life insurance policy, you just have to go through the same steps you did the first time around.

But you do have to watch out for higher rates. Since your life insurance policy will become more expensive the older you get, and you’ll have to go through the underwriting process again, your policy will be pretty pricey this time around – the opposite of what drew you to it when you were younger. Buying a 15-year term at age 60 will cost you more than double what it would cost you at age 50.

Hopefully, you won’t need to cover dependents for very much longer, so if you do need it, you’re probably better off converting your term policy into a whole policy rather than applying for an entirely new 10- or 20-year term policy. Term life insurance is usually much cheaper than whole life insurance, but it requires going through the underwriting process again once your policy expires, so there's a chance you no longer qualify for a plan.

Buy a different permanent insurance policy

Whole life insurance is just one type of permanent life insurance – it gets its name because it’s permanently in place for as long as you pay your premiums, and won’t expire like term life insurance.

Some of the other types of permanent life insurance include:

  • Simplified life insurance is a no medical exam policy that gets you covered with just a health questionnaire – no health exam required.

  • Guaranteed issue life insurance goes even further and does away with the questionnaire. If you can pay, you can get covered.

  • Final expense life insurance is available for older people (usually only ages 50-80, and expires when the policyholder turns 100) to use for medical expenses, funeral expenses, or any other end-of-life costs.

Unfortunately, buying permanent life insurance (including whole life insurance) is sort of the worst of all worlds. You’re paying much more than term life insurance, for much less coverage.

If you opt for a new term policy when you turn 60, that can run you anywhere from $150 to $200 a month for $500,000 worth of coverage. Guaranteed issue life insurance, for comparison, also costs around $200 a month...for $10,000 worth of coverage.

Needless to say, that’s what lands this option last on our list.

Overall, your best situation is to have life insurance while you need it, and then, at some point, no longer need it (and no longer have it). You can achieve this goal through a mixture of calculating your life insurance need, budgeting properly, and investing and planning for your future. If you’re worried about the money it’ll cost, you should try the ladder strategy, allowing you to buy multiple policies of varying coverage and terms so you’re covered when you need it but never paying for too much of a safety net.

If you do all that, you’ll be on your way to financial freedom – just what your life insurance policy would have wanted.