Can You Renew Term Life Insurance?
When your term life insurance policy ends, learn your options for renewal, conversion, or new coverage to maintain essential protection.
Term life insurance provides financial protection for a specific period, typically ranging from 10 to 30 years. Policyholders pay regular premiums, and if they pass away within this defined term, a death benefit is paid to their designated beneficiaries. This type of insurance is often chosen to cover financial obligations that exist for a set duration, such as a mortgage, childcare expenses, or college tuition for children. As the term approaches its end, policyholders frequently consider whether they can continue their coverage.
Renewing Term Life Insurance
Many term life insurance policies include “guaranteed renewability.” This means the policyholder can extend their coverage at the end of the initial term without needing to undergo a new medical exam or re-qualify based on their health status. This ensures continued coverage even if health has declined since the original policy was issued.
When a term policy with guaranteed renewability reaches its end, it typically converts to an annually renewable term (ART) policy. While the death benefit amount usually remains the same, the premium for an ART policy increases each year. This annual increase reflects the policyholder’s advancing age and the associated higher mortality risk. Although convenient, ART can become very expensive over time.
Influences on Renewal Cost
Renewal premiums for term life insurance increase due to several factors, primarily age. As individuals age, their mortality risk increases, directly impacting the cost of insurance. Insurers use actuarial tables to calculate premiums, reflecting the higher likelihood of a payout as the insured gets older. For instance, premiums can increase by 5% to 8% annually in a person’s 40s and by 9% to 12% annually if they are over age 50.
The original policy’s terms and conditions outline the renewal rates. While guaranteed renewability means a new medical exam is not required for renewal, an individual’s current health status would affect the cost if they were to purchase a brand new policy. Factors beyond age, such as lifestyle choices, occupation, and family medical history, affect new policy costs, but for a guaranteed renewal, age is the primary driver.
Other Coverage Options
Beyond renewing an existing term life policy, policyholders have other options as their coverage nears expiration. One common alternative is to convert the term policy into a permanent life insurance policy, such as whole life or universal life. Many term policies include a conversion option, allowing this change without requiring a new medical exam, provided the conversion occurs within a specified timeframe. While permanent policies offer lifelong coverage and may build cash value, their premiums are generally higher than those for term policies.
Another option is to purchase a new term life insurance policy. This involves a new application process, including underwriting and often a medical examination. If the individual’s health has remained good, or even improved, purchasing a new policy could result in more competitive rates than renewing the existing one, especially if the current term policy’s renewal rates have become very high. This path allows policyholders to reassess their coverage needs and secure a policy better suited to their current financial situation and health.
Choosing Your Path Forward
When a term life insurance policy approaches its expiration, an informed decision requires evaluating current financial needs, health status, and budget. Policyholders should assess whether their need for coverage has changed since they initially purchased the policy. This involves considering ongoing financial obligations like mortgages, support for dependents, or future expenses such as college education. A needs analysis can help determine the appropriate amount of coverage still required.
It is advisable to review the original policy documents to understand any guaranteed renewal clauses or conversion options, including any time limits for conversion. Gathering quotes for new term life policies is also a step to compare potential costs and benefits against the renewal or conversion options. Consulting with a financial advisor can provide personalized guidance, helping to weigh the advantages and disadvantages of renewing, converting, or purchasing a new policy based on individual circumstances and long-term financial goals.