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What to do if your life insurance’s term is almost up

Life Insurance

Term life insurance policyholders generally have a couple options if their term is ending and they desire further protection. They may be able to renew the policy without submitting to a new medical exam — or buy a new term life policy. Another possible option is to buy a permanent policy. This article highlights the advantages and drawbacks of each choice.

Here’s a common scenario: A young couple buys a 20-year term life policy when their children are born and they buy a home. They assume that at the end of the term, their children will be financially independent and the mortgage will be paid off. However, children often are dependent on their parents well into their 20s and mortgage payments can continue indefinitely — especially if homeowners have refinanced. If this is your situation, you’ll probably want to consider extending your life insurance coverage.

Extending the term

You generally have a couple options if your term policy is ending and you desire further protection. For example, you might be able to renew your existing policy. This can be a good choice if you have health problems because many policies allow you to renew without being required to answer health-related questions or undergo a medical exam. However, depending on your age, premiums may increase, especially at the conclusion of a specified level term period.

Another option: Purchase a new term life policy. This typically is for people in reasonably good health. Recent developments in the insurance industry have led to generally lower prices and innovative new products. Some policies offer “living benefits,” which allow you to accelerate death benefits in the event of a terminal illness.

To obtain a new policy, you’ll need to answer health questions and submit to a medical exam. Premiums will likely be higher than those of your initial policy. But you may be able to limit costs by selecting a shorter term, such as five or 10 vs. 20 years. Another option: If you need coverage for only a few years and can afford sharp price increases, purchase a policy that’s renewable annually.

Permanent solution

You might also consider switching to permanent life insurance. This choice may make sense if your future financial obligations are uncertain or you wish to use life insurance to leave wealth to your children.

Whole life, universal life and variable life policies are more expensive than term life policies, but they provide a death benefit typically for the rest of your life. They also include an investment component that allows you to build cash value on a tax-advantaged basis. Many term life policies allow you to convert to permanent life insurance without a medical exam. And to hold costs down, you may be able to convert your term policy to a permanent policy with lower death benefits.

If you’re considering converting to permanent life insurance, review your term life policy as soon as possible. Most policies set a deadline for converting, which may be several years before the term expires.

Starting out

What if you’re a young adult who wants to purchase life insurance but don’t want to have to extend coverage at high prices decades from now? Permanent life insurance would solve the problem, of course. But the premiums may not fit your current budget.

You might consider purchasing a term life policy with a longer term, such as 30 years. Or you might buy a 20-year term policy with the largest death benefit you can afford, and then supplement it with a 30-year term policy with a smaller death benefit.

What’s clear

Life insurance is essential if you have a family or assets to protect. What may not be so clear is the type of life insurance you need and can afford. So if you’re uninsured or have a term policy that’s ending, talk to your insurance agent.