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What happens when my term life insurance policy expires? | Michigan Life Insurance

posted Jan 16, 2019, 1:05 PM by Jason Grubbs   [ updated Jan 16, 2019, 1:08 PM ]
Term Life Insurance - Michigan

Term life insurance is the lowest cost type of life insurance policy you can purchase - making it an ideal policy for families needing financial protection during their working years.

Since most people prefer to plan their budget around a fixed expense, rather than having the cost for life insurance increase each year as they age, insurance companies offer term policies.  The "term" is simply the time period during which the rate - how much you pay for life insurance - remains the same each year.  Typically you can purchase a term option of 10, 15, 20, or even 30 years - providing the opportunity to lock in your coverage and cost for extended lengths of time.

When you initially purchase a term life insurance policy you decide the term - length of time - you want the rate to remain level based both on how long you expect to need coverage and your budget.  The longer the term, or period of time the rate remains level, will affect how much your term life insurance policy costs.  A term life insurance policy locking in your coverage and cost for 20 years would initially be more expensive than a policy locking in your coverage and cost for only 10 years, but is also likely to be a better value over time if you would need coverage for 20 years.

What is commonly referred to as the expiration of a term life insurance policy is really the end of the time period during which the rate for the policy doesn't change.  Most term policies don't literally "expire" - term policies typically will continue up to age 95 - however, once the term you selected to lock in the rate ends the cost to continue your policy will increase, usually significantly, and continue increasing with each passing year.

Does that mean you're simply stuck paying the higher - and ever increasing - cost to continue an expiring term life insurance policy?  By no means; in fact, you are almost always best served to simply replace an expiring term life insurance policy.

Replacing a term life insurance policy

When you initially purchase a term life insurance policy you go through an underwriting process.  That process involves submitting an application stating how much coverage you intend to purchase along with furnishing details about you.  The insurance company may review your health, medical history, medications, family history, and activities to evaluate their risk insuring you and determine the rate at which they're willing to provide coverage.

Once a life insurance policy is approved and issued the insurance company doesn't have a right to require you to repeat the underwriting process - the insurance company is not permitted to later check whether your health has changed and cannot adjust your rate based on anything specifically related to your individual health or risk of dying.  Due to this when the initial term (length of time the rate remains level) expires, while you have the right to continue a term life insurance policy insurance companies price that option assuming you may no longer be in good health.

If you still need life insurance when the term you selected to lock in your coverage and rate ends insurance companies prefer to have an opportunity to once again complete the underwriting process.  This enables the insurance company to evaluate your current health and the rate at which they're now willing to provide coverage.  As long as you're in relatively good health it's likely to your advantage to apply for a new policy and complete the underwriting process - whether with the same insurance company or another insurance company.

Converting a term life insurance policy

Almost every term life insurance policy now sold includes a conversion privilege, which is simply the right to exchange a term life insurance policy for a permanent life insurance policy offered by the same insurance company.

Permanent life insurance policies - commonly Whole Life or Universal Life - are a more expensive type of life insurance policy usually designed to provide coverage for the entire duration of a person's life.

Converting a term life insurance policy may be advantageous as there aren't any medical or underwriting requirements.  A conversion privilege automatically entitles you to convert to a permanent policy with coverage up to the amount of coverage on the current policy.

Keep in mind permanent life insurance policies are a more expensive type of life insurance.  While a conversion privilege would allow you to skip the underwriting process of applying for a replacement policy converting to a permanent policy isn't likely to be the most cost effective option to continue coverage and may not be the type of life insurance policy best suited to your needs.

There may be limitations on how long you are eligible to convert a term life insurance policy - typically within a specified number of years or by a specified age.

Renewing a term life insurance policy

In most circumstances, you can also simply continue or "renew" an expiring term life insurance policy.  As mentioned, the rate for continuing a term life insurance policy is likely to be significantly higher than purchasing a replacement policy.  However, if you have a health issue that prevents you from obtaining a favorably priced replacement policy renewing may be your best option - particularly if your need for continuing coverage would be limited in duration.

What should you do when your term life policy is expiring?
Life Insurance Calculations - Michigan

It's advisable to review an expiring term life insurance policy and take action well before the term ends - ideally 3 to 6 months beforehand.  This will provide time to research options, make an informed decision, and - if you decided to purchase a replacement policy - get approved and have the replacement policy in place before higher rates to continue your expiring term policy take effect.

The first step is to get in touch with your insurance agent.  Let your agent know you are interested in options to continue coverage when your term life insurance policy expires.  You will help your agent in that process by having clear ideas of how much life insurance coverage you still need, the length of time you want to extend coverage, and how much you can afford to budget.
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