What Happens If You Outlive Your Term Life Insurance?

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UPDATED: 2022-07-25T05:37:10.199Z
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Life insurance coverage is the best way to protect your family's financial future but with a term policy, there's a risk that you'll live past the end date. If you find yourself at risk of outliving the financial protection of a term life insurance policy, you can take steps to ensure that you and your family remain covered. Find out about the types of life insurance policies and what happens if you outlive your term life insurance policy.

What is Term Life Insurance?

While permanent life insurance products cover policyholders for their entire lives, a term life policy only provides coverage for a set period of time. Depending on the length of the plan you want, you can find term policies ranging between ten and thirty years, sometimes longer.

Just as with permanent insurance, you pay monthly or annual premiums on a term life policy. Assuming that you die within the coverage period, your insurance provider will pay out a death benefit to your family or other beneficiaries.

If you die after your term coverage has lapsed, however, your beneficiaries receive nothing. For people with no dependents or outstanding debts, this may not pose a problem. Others, however, wish to leave children, spouses, or other beneficiaries with a safety net.

Term life insurance is a popular choice because it tends to be cheaper than permanent plans. It also allows for more flexibility as your living situation changes over the years. If you decide that a term life plan is the life insurance plan you need, there are several different types of term insurance plans to choose from:

  • Level Term Insurance: This tends to be the gold standard in term insurance, with the same monthly premiums throughout the entire policy.
  • Instant Decision Insurance: While traditional policies require a medical review, this type of plan uses a simple phone interview for a quick, easy, and near instantaneous application.
  • No Medical Exam Insurance: Like instant decision plans, this type of policy requires no initial medical exam. Instead, providers go in-depth looking at your medical records before making a decision on your application.
  • Annual Renewable Insurance: You pay an annual rate that starts cheaper than most other plans but grows with each passing year. This plan often ends up costing more than others in the long run.
  • Decreasing Term Insurance: This type of plan boasts the same premium each month without raising rates. However, the death benefit decreases each year. While this type of policy is one of the cheapest options, most providers don’t offer it.
  • Return of Premium Insurance: This is the only type of term insurance with cash value, refunding premiums if you outlive your policy. Return of premium plans are often some of the most expensive available.
  • Group Term Insurance: If you work for a company with good benefits, your package will often include group term life insurance for you and your fellow employees. Your employer covers some or all of your premium costs. With this type of plan, you lose your coverage if you lose your job.
  • Mortgage Protection Insurance: If you're worried about paying your mortgage after death, this type of plan ensures that your premiums cover the cost. Your house goes to your chosen beneficiaries instead of back to the bank.

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What should I do when my policy expires?

If you’re worried about outliving term life insurance policy, you should start thinking about what sort of safety net you need going forward in life. If you don’t want your policy to lapse, you can either convert it to a permanent plan or purchase a new term policy. With a replacement policy, you can ensure that your family will receive their due death benefit.

Converting to a Permanent Policy

While you can't extend an existing term policy, you can often convert it into a permanent plan if you decide to extend your coverage period. Many term policies include a term conversion rider that allows you to convert your policy upon expiration.

While you’ll have to remain with the same insurance provider, there are some benefits to converting your plan. Most providers allow you to skip the lengthy underwriting process, including their required medical exam. Even if your health has declined, you can maintain your current insurance classification for cheaper coverage.

For older applicants, converting from a term to a permanent policy later on down the line can save costs on premiums. Permanent plans charge around three times more for elderly adults when compared to young, healthy policyholders.

Keep in mind that converting to a permanent plan isn't likely to decrease monthly premiums. Some providers offer term conversion credits to lower premiums for the first year, but for the most part, expect your bills to remain the same or higher.

Purchasing a New Term Policy

While a conversion can sometimes save money for older adults, those in good health often save the most by taking out a new policy. Before your coverage has lapsed, you should look into term insurance providers in your area to pick out a plan with the coverage you need.

Keep in mind that with a new policy, you'll likely have to undergo an underwriting process. If your health status has changed at all since your last plan, it could end up raising your monthly premiums. You may also find yourself ineligible to apply to certain policies. It's a good idea to give yourself enough time to prepare yourself and shop for the right plan.

Unlike conversion, taking out a new policy allows you to change coverage options and even switch over to a different price tier. You may be able to find something that better fits your budget, especially if you find yourself needing less coverage over the years.

When taking out a new term policy, one of the most important considerations is the length of coverage. Older adults may want to save by applying for a shorter coverage period than a healthy adult with young dependents. Keep in mind that age can affect life insurance rates as well.

Can I Cash Out a Term Life Policy?

With many permanent life insurance plans, a part of your monthly premium goes into an investment account. If times get tough and you need fast cash, you'll have access to emergency funds. The value of a permanent plan rises the longer you hold it.

You can usually cash out a permanent policy by surrendering the policy and withdrawing the total amount or borrowing from your premium pool. Some plans allow you to take out a fraction of the cash value, typically free of income tax.

Unfortunately, life term insurance doesn’t usually come with cash value. At no point can policyholders withdraw funds from their accounts. This lack of cash value is why term insurance tends to be significantly cheaper than permanent insurance plans.

If you're concerned about recovering your premiums, some providers offer return of premium life insurance plans. While these term policies offer some cash value, they're often cost prohibitive.

When Should I Renew My Policy?

Whether you’re converting to a permanent plan or buying a new term policy, you should give yourself plenty of time to negotiate coverage. If you wait until the last minute, your family may suffer a coverage gap. If you die during this period, your provider isn’t required to pay out a death benefit.

It’s best to start looking into renewing your plan as early as six months before the end date. If your provider offers a term conversion rider, you may want to begin the process as early as a year ahead of time.

Most insurance companies require that you convert while the policy is still active, so you want to allow for plenty of time for unforeseen setbacks. Start searching early to ensure that you have all the necessary paperwork and pass any required medical or phone examinations.

Can I Let My Policy Lapse?

While many people choose to continue coverage after outliving term life insurance policy, some decide to let their policy lapse. Once the plan expires, their beneficiaries will no longer receive a payout upon their death.

If you no longer have dependents, you may not need to have a financial security net in place after death. You may also have more savings at the time of expiration than you did when taking out the policy. For those who can support themselves and their dependents, an active life insurance policy isn’t always a necessity.

For those whose policy is approaching its expiration date, it’s a good idea to spend some time thinking about current coverage needs. If you provide financial support to loved ones, owe outstanding debts or mortgages, or if you have little to no savings, you may not want your policy to lapse.

If you choose to let your policy expire, know that you won't see any payout from the money you've put into your account. If you pass once coverage has lapsed, your family won't get any death benefit or other financial compensation unless otherwise stated.

For most people, it’s best to keep coverage constant over the years. With an active term life insurance policy in place, you can secure your family’s future and with due diligence, you can ensure that your coverage doesn’t lapse.

When choosing the best life insurance company and policy for you, make sure you evaluate all options, policy offerings, and prices.

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