What happens when a term life insurance policy matures or expires?
If you’re reading this, that means you’re not dead yet and the death benefit from your current policy will never be paid out to your family. This is really great news.
And if you’re debt free, mortgage free and the rest of your family is financially independent, that’s even better. You probably don’t need life insurance anymore because there’s nothing you really need to cover in the case of your death — well, besides the funeral costs.
But if you still owe money, or you need to take care of a family member that’s not working, you’ll want to arrange a new policy.
How much coverage you need depends on your new situation, including the balance left on your mortgage and where your family members are in their life and career. If things are going smoothly, it will probably be a lot less than your current death benefit.
A broker can help you figure out your mid-life needs and also do a lot of the essential legwork for you, finding out which insurance company and which policy will give you the most coverage for the lowest price. Best of all, their services come free.
We asked Andrew Ostro, co-founder and CEO of the online brokerage PolicyMe, to lay out some of your options to help you make the right moves.
What’s better? A term policy renewal or a new term policy?
Assuming you’re in good health, Ostro votes for a brand-new term policy that’s medically underwritten. He says you’ll want to act before your current policy reaches its maturity date, because your life insurance might be set up to automatically renew — at eight to 10 times your current premium.
Why do the prices go up so much? Renewals are usually non-medical, meaning there’s no exam required. Your insurance company just assumes your health has deteriorated and that your risk of death has increased by a predetermined amount.
Sure, a medical exam will take up some of your time, but it’s so worth the savings you’ll get once you prove you’re physically fitter than your current insurer assumes.
“There are medically underwritten products that are an instant decision,” Ostro adds. “If you’re applying for a policy under a million dollars and you’re under 50 years old, we may be able to approve you instantly at the cheapest possible price without digging deeper.”
When you’re living with a manageable health issue, such as high cholesterol, the pro says you should shop around and compare the costs of a non-medical renewal and a new term policy — either with or without a medical exam.
The key is to start the process a few months before your policy expires so you have time to find the best value and price for your needs.
Should I convert to a permanent policy upon the end of term life insurance?
Ostro gives permanent policies a thumbs down because the premiums are so expensive, sometimes up to 10 times as expensive as a term policy with the same coverage.
However, there are instances when it makes sense to convert to a perm policy.
If you’re living with a severe health condition or terminal diagnosis, Ostro strongly advises going for a guaranteed conversion if it’s available to you. A conversion option switches your term policy to a perm policy without a medical exam, and its value and premiums are based on regular and healthy aging versus the picture of your actual health.
It will probably still be more expensive than a term policy, but your family will be provided with a larger death benefit because most perm policies also act as investment vehicles that collect dividends. Whole or universal life policies act like savings accounts designed to produce interest on your premiums.
The other time you might consider a switch is when you’ve maxed out your TFSAs and RRSPs and you need to be smart about estate planning. Switching to a permanent policy will give you another place to stash a lot of cash, and your death benefit will be paid out tax-free to your family.
Can I terminate my policy before it expires?
You totally can, so long as you’re doing it for the right reasons. If you’re living free of entanglements earlier than you expected, go ahead and cancel the policy and save on your monthly premiums, stat.
The opposite also applies. Did you have more kids, mortgage a vacation home or take out a big loan for a startup? Whenever you have more debt or dependents, look into a new policy with a larger death benefit to protect your family from large, looming payments.
Don’t fall for the bells and whistles
As a final piece of advice, Ostro of PolicyMe says to watch out for specialized insurance you don’t need. Like a fully loaded car, life insurance policies can get jacked up with pricey features that don’t always add up to more value for you.
Annual Renewable Term Life Insurance The upside: These policies start off very affordable, because your premium is always based on the risk that you’ll die in the current year. The downside: The rates increase year by year, and you may end up spending more than you would have with a single, guaranteed rate over the life of the entire term.
Decreasing Term Life Insurance The upside: You can decrease the value of your policy over time. For example, you may need $500,000 in coverage today but only $250,000 in five years. The downside: The money you save in premiums is nominal for the amount you lose in the death benefit.
Return-of-Premium Term Life Insurance The upside: You get all the money you paid in premiums back if you’re still alive when the policy expires. The downside: It’s kind of like buying insurance on insurance. The premiums are far more expensive, and you miss out on the opportunity to spend or invest all that excess cash.
Mortgage Protection Term Life Insurance The upside: The policy pays off your mortgage in the event of your death and is conveniently presented to you by your lender. The downside: The policy pays the mortgage lender directly. For more flexibility, pick a regular term policy that can clear your mortgage and all your other debts, too.