What Happens After 20-Year Term Life Insurance?

Term life insurance provides coverage for a specific period, such as 20 years, offering a death benefit to beneficiaries if the insured dies within the policy’s term. It is often chosen to cover financial obligations that exist for a set timeframe, like a mortgage or the years a child is dependent. As a term policy approaches its end, policyholders face decisions about their ongoing need for coverage and the available choices to maintain protection.

Understanding the End of Your Term Policy

When a 20-year term life insurance policy reaches its maturity date, the initial level premium period concludes. The predictable premium you paid for two decades will no longer apply. Unless action is taken, the policy may terminate, meaning coverage ceases and no death benefit would be paid.

Many term policies include a provision for automatic renewal on an annually renewable term (ART) basis. If renewed, premiums will increase significantly, often dramatically, because they are recalculated based on the insured’s current, older age and associated mortality risk. These renewed premiums typically rise each year, reflecting the increasing likelihood of a claim as the policyholder ages.

Your Options for Continued Coverage

Upon the expiration of a 20-year term policy, you have several paths for continued financial protection, each with its own characteristics and financial implications. The choice depends on your current health, financial situation, and ongoing need for coverage.

Renewing Your Existing Term Policy

Many term life insurance policies offer the option to renew coverage without a new medical exam or additional underwriting. This can be beneficial if your health has declined, making it difficult to qualify for new coverage. However, premiums for a renewed term policy will be substantially higher than your original premiums and will continue to increase annually with your age. While it ensures uninterrupted coverage, this option is generally not the most cost-effective long-term solution due to escalating costs.

Converting to a Permanent Life Insurance Policy

Many term policies include a “conversion privilege,” allowing you to convert all or a portion of your term coverage into a permanent life insurance policy, such as whole life or universal life, without a new medical exam or proving insurability. This is an advantage if your health has changed, as it guarantees lifelong coverage regardless of your current health. Permanent policies accumulate cash value on a tax-deferred basis, and death benefits are generally income tax-free to beneficiaries. However, converting results in significantly higher premiums compared to your original term policy, reflecting the lifelong coverage and cash value. Policy contracts typically specify a deadline or age limit for this privilege.

Purchasing a New Life Insurance Policy

Another option is to apply for a new life insurance policy, which could be another term policy or a permanent policy. This process involves new underwriting, including a medical examination, and premiums will be based on your current age and health. For individuals in good health, applying for a new policy can often be the most cost-effective way to secure continued coverage, potentially at a lower rate than renewing an existing term policy. If you opt for a new term policy, you can select a new term length that aligns with your revised financial protection needs.

Allowing the Policy to Lapse

If your financial obligations have diminished or disappeared, and your dependents are no longer reliant on your income, you might choose to let the term policy expire. In this scenario, coverage simply ends, and no death benefit will be paid if you pass away after the expiration date. This decision is suitable if the original purpose of the insurance, such as covering a paid-off mortgage or financially independent children, is no longer relevant. Generally, there are no tax implications for the policyholder when a term life insurance policy lapses.

Key Considerations for Your Decision

When determining the best course of action for your expiring term life insurance, evaluate your current circumstances. Assess your present health, as it directly impacts eligibility and the cost of new insurance options. If your health has declined, options not requiring a new medical exam, such as renewing or converting, may be more appealing despite higher costs.

Consider your ongoing financial obligations, including any remaining mortgage debt, outstanding personal loans, or continuing support for dependents. The amount of coverage you need should align with these responsibilities. A common approach to determine this need involves calculating current debts, future income replacement needs, and educational expenses.

Your budget constraints also play a significant role. Balance the need for coverage with what you can realistically afford to pay. Finally, review your long-term financial goals, including estate planning and wealth transfer objectives. Permanent life insurance, with its cash value and lifelong coverage, can serve as a tool in these broader financial strategies.