The dreaded term insurance bandit

BY ANDREW STEWART

Term insurance; it can be like the beginning part of a wonderful relationship. Mostly all smiles and good times, no stress and you feel really good about being in it. Or it can be that stale, boring, costly relationship that you don’t know how to get out of. You feel stuck, angry and wish you knew in the beginning it would be like this.

I know this analogy is a bit on the dramatic side, but these are some of the emotions I’ve seen some clients have about the term insurance policies they bought. Don’t get me wrong I’m not condemning term insurance. It plays a very vital role in making sure families and businesses are protected from financial ruin. I’m referring to when a person forgets their renewal timeframe and is now faced with a difficult situation.

What can you do when your term policy is going to expire?
How long your term life insurance policy lasts is chosen by you. Term life insurance is there to provide financial protection for your loved ones against premature death. But what happens when you get that renewal notice and now your monthly premium is 10x more? What options do you have? Let’s discuss term policy expiration.

You can buy a new life insurance policy.
I know this one will be the most unpopular, but this is an opportunity to possibly purchase a shorter term and maybe more coverage to be a more affordable alternative. Keep in mind when buying a new policy you will have to re-apply which means a new medical exam, unless you opt for a no-exam policy which have limitations and are more expensive.

You can convert your term policy into a different term or permanent policy.
Many term life insurance policies automatically include a conversion option at no charge. A conversion option allows you to convert you term life insurance policy without having to do a medical again. In other words, even if the insured person developed a serious illness, such as cancer, the term policy can still change into a permanent policy. Most insurance companies allow you to make partial conversions. A partial conversion is when you only take a portion of your term policy’s face amount and convert it to a permanent policy. In doing so, you then have two separate policies.

You can renew your term coverage.
As I mentioned earlier term insurance is renewable. This means the insurance company dictates to you how much the increased premium will be for another go around of coverage. A 50 year old man who purchased a Term 20 with $500,000 of coverage when he was 30 was paying $380 per year and forgot about the policy, his renewal was now going to cost him $3,450 per year for the same coverage. People who renew are usually those who are diagnosed with a health issue that reduces their life expectancy.

You can reduce your coverage or just let the policy go.
I’ve said it before; depending on your situation and the stage of life you’re at, you may not need to have so much coverage or even at all. If you are mortgage free, no debt, no dependent children or parents and your spouse doesn’t depend on your income to sustain them, then there is a valid argument of needing life insurance. Now if you have a large estate value then life insurance helps ease the burden of estate taxes and transferring of wealth.

So do not wait until your policy expires to decide what to do. I’ll elaborate more on why the term conversion is so important in my next article.