TERM LIFE INSURANCE: WHAT HAPPENS WHEN THE TERM ENDS?
My husband and I have been minimalists when it comes to life insurance. Early on, we chose to invest in the stock market and save up our own reserves to get us through a tragedy. In fact, we did not even purchase term insurance until we were in our early 40’s, when I became an agent. I am very grateful our story is not like many I have heard from clients who lost a friend or relative with small children. Had my husband passed while our three daughters were young, our lives would have been completely different.
But my blog today is not about the importance of buying life insurance, as serious a message as that is. The people who will read this, by and large, know the importance of life insurance. Rather, this blog is to address the question many of you ask, “What happens when the “term” of a term life insurance policy ends?”
This is an excellent question, as thousands of life insurance term policies “end” each year. It has been a trend to “buy term and invest the rest”, and life insurance minimalists like myself often feel we will no longer need life insurance once the kids are through college or the mortgage is paid off. Many folks take out short term policies just because they cost less than longer ones. Some buy the shortest term policy required to obtain a business loan or satisfy a divorce decree.
In addition, “quick” Term policies offered byAARP, AAA, and other organizations have become very popular. While they start out reasonably priced, some of these policies can raise prices as often as every 1-5 years. In fact, you must review the features of every term policy, quick issue or not, to see if the price is actually guaranteed not to go up for the entire term. If that guarantee does not exist, you may find yourselves facing higher premiums even before the term ends.
For most policies, when the number of years in the term have passed, there is a “renewable” period during which you can extend the years your policy is in effect. This new price is generally much, much higher than the premium you were previously paying, and (unless you had some type of rider or your policy had extended coverage built in), the prices now can be raised annually. Most policies cannot be renewed past a certain age.
“Conversion” is another feature offered by many Term policies, where you are allowed to convert some or all of your term policy to a universal life or whole life policy without evidence of insurability. In essence, you can exchange your term policy for one that lasts much longer, no health questions asked, with the same health rating as your term policy was rated. Your prices will still be much higher because you are buying longer coverage, and you are buying it at an older age. If you can afford the higher price, though, at least you don’t have to worry about it going up each year, as when renewing term coverage.
In reality, most people who buy term insurance end up trying to buy another term policy when their term ends, because the cost of renewing or converting is prohibitive for them. This works out fine for them as long as they are willing to pay more for their next policy, due to being older. It also works out fine if term prices do not raise a lot across the board. But as an impaired risk specialist, what I too often see throw a wrench in this plan, is the development of a health condition since the last policy was purchased.
While we work our tails off to find the best prices from 50 companies for people with health conditions, the fact is that even small health problems can greatly affect life insurance rates. In fact, a 30 year old who was rated Preferred Plus can apply 10 years later, still in perfect health, and be rated Standard simply because her 64 year old father had a heart attack in that time! That is enough to double premiums, not even taking age into account.
Nearly every week we hear from someone who has been diagnosed with Diabetes, MS, Cancer, Hepatitis C, or some other health condition, who wishes they had held onto a past policy OR who wishes they had taken a longer term on their current coverage. Yes, when people are healthy, or their health condition is controlled, they feel on top of the world, and it seems foolish to spend more to lock in a longer term. But the stark reality is that it is far less costly to take a longer term policy rated Preferred, than to take a shorter one rated up for a health condition later on.
Why do I bring this up now? A new regulation is going into effect on 1-1-2013 that is already raising prices on Universal Life with guaranteed long term coverage, and some companies are dropping this type of product altogether. 30 year Term has already been trimmed from the portfolio of some companies and could also see a price increase with others. If you want to take advantage of these long term guarantees, now is the time. You really cannot even wait a month. Just let us know and we will get your app in so you can get your rate locked in.
Thank you and have a great weekend!