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Life doesn’t stand still, and neither should your life insurance. When you first bought your term life insurance policy, you likely chose a term length based on your financial situation at the time. But what happens if your needs change? Maybe you bought a 10-year term to keep costs low, but now you realize you need coverage for 20 or 25 years. Or perhaps your mortgage has been extended, and you want your life insurance to match.
That’s where a term exchange option comes in. This feature lets you extend your term life insurance policy by switching to a longer term without having to go through medical underwriting. That means even if your health has declined, you can still extend your coverage.
In this guide, we’ll explain how term exchanges work, their benefits, and potential downsides, so you can decide if this option is right for you. We’ll also compare which insurance companies offer term exchanges and what their policies include.
By the end of this post, you’ll have a clear understanding of your options and be better equipped to make a smart decision about your life insurance.
- Key takeaways:
- Most term products in Canada offer an exchange option, allowing you to extend your term life insurance policy without medical underwriting.
- A term extension can help align with your changing financial needs, cover longer debt periods, and maintain your coverage even with declining health.
- On the downside, term exchange options may not be contractually guaranteed, have limited time frames to exercise your right, or have limited term lengths available for an exchange.
What Is Term Life Insurance?
Term life insurance is a straightforward way to protect your loved ones financially. Essentially, you pay a fixed premium for a set period (the term), and if you pass away during that time, the insurance company pays out a tax-free lump sum benefit to your beneficiaries. The payment can help your family maintain their lifestyle, replace your income, pay off debts like a mortgage, and cover other financial obligations.
Term life insurance is especially suitable if you have dependents, carry significant debt, own a business that might be affected by your or a partner’s absence, or need additional coverage to supplement your group life insurance.
Although term life insurance doesn’t accumulate any cash value, it’s often considered worth it because it is much more affordable than permanent life insurance, allowing you to secure a substantial amount of coverage for a relatively low cost.
The amount of coverage you need depends on your personal and financial circumstances. Generally, you should consider a death benefit amount that is sufficient to pay off your debts and replace your income, ensuring your family isn’t left under financial strain.
Term length
One of the key advantages is that you can choose the term length and the coverage amount that best fits your situation. Common term lengths are 10, 20, or 30 years, though you can opt for any term from 5 to 50 years. While your premium remains guaranteed during the term, it can increase dramatically if you renew the policy at the end of the initial period—this is why it’s vital to choose an appropriate term length, even if it means paying a higher cost upfront.
The graphs below compare premium trends for 10-year and 20-year term life insurance policies. They highlight the difference between level premium renewals (where the premium stays fixed and level for the renewal term) and annually increasing premiums, as offered by two separate insurance providers.
What Is A Term Exchange Option?
When extending your term insurance plan, you’re not simply renewing it past its initial term—a process most insurers offer but one that comes with significantly higher renewal rates. Instead, a term life insurance exchange option (also known as term-to-term conversion by some companies) lets you change your current term length to a longer one without the need to provide new medical evidence of insurability.
For example, you can exercise a term exchange to convert your 10-year term policy into a 20-year term policy. When you do this, your premium will be locked in for the next 20 years. The cost will increase based on your age when you exercise the option, using the premium rate in force on that date.
Imagine a 35-year-old male non-smoker who initially purchased a $500,000 term-10 policy for $22 per month. If he decides to exchange his plan five years later, his new premium would be based on a 40-year-old male non-smoker. Using today’s rates, the premium would increase to $44 per month, guaranteed for the next 20 years. Although rates are always changing, you can use the current rate as an approximation of what you might pay in the future.
This term exchange option can also be used on joint first-to-die term insurance policies—policies that cover two people and pay out when the first person dies. These are especially popular for covering significant debts like a mortgage so the survivor can live without the burden of servicing the loan.
Benefits of exchanging your term insurance policy
Exchanging your term life plan offers several advantages that can help you better align your coverage with your evolving needs and financial situation. Here’s a closer look at the key benefits of term life insurance extension:
Budgeting and costs: You might have originally bought a shorter term policy, like a term-10, to keep your premiums affordable—even if you needed coverage for 25 years. At that time, a term-25 policy might have been out of reach due to other financial priorities.
As your financial situation improves, you can revisit your coverage. If five years have passed, you could exchange your term-10 policy for a term-20. This change effectively extends your coverage to a total of 25 years, aligning your insurance with your long-term insurance needs.
Changing financial circumstances: Life circumstances are dynamic, and your insurance needs may evolve. Perhaps you purchased a term-10 policy to cover a mortgage with 10 years remaining. However, if you later decide to purchase a new home with a 25-year mortgage amortization, or if you refinance your existing mortgage to access home equity, your coverage needs change.
By exchanging your term-10 policy for a 25-year term, you ensure that your life insurance adequately covers the full duration of your mortgage, providing peace of mind in the face of unexpected events.
No medical underwriting: A significant advantage of a term exchange is that you don’t need to undergo new medical underwriting. This means that even if your health has declined or you’ve adopted lifestyle habits that increase your risk (like engaging in high-risk sports or accumulating traffic violations), you can still extend your term life insurance policy.
This feature is particularly valuable if you’ve experienced health changes that would make obtaining a new term plan difficult or expensive. It also allows you to secure long-term coverage without the hassle of a new medical exam.
Partial exchange (laddering): The flexibility of a term exchange allows you to convert only a portion of your policy, so it’s not an all-or-nothing scenario. For example, if you have a $1,000,000 term-10 policy, you can choose to exchange $500,000 for a longer term while maintaining the remaining $500,000 under the original plan.
This strategy, known as life insurance laddering, is a cost-effective way to balance short-term and long-term coverage. It acknowledges that your life insurance needs are likely to decrease over time, allowing you to tailor your coverage to your evolving requirements.
Potential downsides of exchanging your term policy
While term life insurance extension offers numerous benefits, it’s essential to be aware of the potential drawbacks:
Not contractually guaranteed: Unlike the conversion option to a permanent life insurance policy, the term exchange feature isn’t always contractually guaranteed. This means that some insurance companies may reserve the right to remove or modify this feature at any time.
If the term exchange option is crucial to your long-term planning, it’s vital to choose an insurer that explicitly includes it as a contractual guarantee within your policy. This ensures that the option remains available when you need it.
Limited term lengths available: You might find that the term exchange option has limitations regarding the available term lengths. Some insurance companies may only allow you to exchange your current policy for a term that is at least 10 years longer.
For instance, if you have a term-10 policy and desire a term-15, you might find that your insurer only offers exchanges to term-20 or longer. This constraint could limit your ability to fine-tune your coverage to your exact needs.
Limited timeframe to exercise exchange: Most insurance companies impose a time limit on when you can exercise the term exchange option. Typically, this window is restricted to the first five or seven years of your policy. If you decide to extend your term length after this period, you may find that the exchange option is no longer available. This necessitates proactive planning and timely decision-making to take advantage of this feature.
Irreversible: Once you exercise the term exchange option, the change is permanent. You cannot revert back to the previous term length. This means you must carefully consider your long-term needs and ensure that the longer term length aligns with your future financial plans before making the exchange. A thorough assessment of your evolving circumstances is crucial to avoid locking yourself into a plan that may not be suitable in the long run.
How To Exchange Your Term Life Insurance Policy
Exchanging your term life insurance policy is a straightforward process. Typically, the insurance company provides you with a form to complete and sign. On this form, you simply indicate the amount you want to exchange to a longer term and choose the new policy length.
Because there’s no requirement for additional medical underwriting, the insurer won’t ask for details about your current health status or lifestyle. This streamlined process allows for quick processing of your policy change with minimal hassle.
Which insurance companies offer term exchanges?
The features of term exchange options vary by insurance company. Some providers allow you to exchange any shorter term for a longer one, while others only let you exchange a specific policy type—such as a term-10 policy. Additionally, some companies permit partial exchanges, letting you convert only a portion of your plan while keeping the rest unchanged.
Because these options differ, it’s important that you determine which features are most important before purchasing a term insurance policy, especially if you plan to extend it later.
Below is a table that outlines various insurance companies offering term life insurance extension options along with their features and conditions:
Insurance company | Exchange option | Available terms for exchange | Time limit to exercise the exchange | Partial exchanges allowed | Contractually guaranteed |
|---|---|---|---|---|---|
Assumption Life | Yes | Any shorter term can be exchanged for a longer term | Before year 7 | Yes | Yes |
Beneva | Yes | Any shorter term can be exchanged for a longer term | After year 1 and before year 5 | Yes | No |
BMO Insurance | Yes | Term-10 and term-15 can be exchanged for a longer term | After year 1 and before year 5 | Yes | Yes |
Canada Life | Yes | Any shorter term can be exchanged for another term that is at least 10 years longer than the current term | After year 1 and before year 7 | Yes | Yes |
Canada Protection Plan | No | ||||
Desjardins | Yes | Term-10, term-15, term-20, and term-25 can be exchanged for a longer term | Before year 5 | Yes | Yes |
Empire Life | Yes | Any shorter term can be exchanged for another term that is at least 10 years longer than the current term | Before year 7 | Yes | No |
Equitable Life | Yes | Term-10 can be exchanged for term-20 | After year 1 and before year 5 | Yes | Yes |
Foresters | Yes | Any shorter term can be exchanged for a longer term | After year 1 and before year 5 | Only if the remaining amount is converted to a permanent insurance plan | Yes |
Humania | Yes | Any shorter term can be exchanged for a longer term | After year 1 and before year 5 | Yes | Yes |
Industrial Alliance | Yes | Term-10 can be exchanged for term-20 or term-30 | Before year 5 | Yes | Yes |
ivari | Yes | Term-10 can be exchanged for term-20 or term-30 | After year 1 and before year 5 | Yes | Yes |
Manulife | Yes | Any shorter term can be exchanged for a longer term | Before year 5 | Yes | Yes |
RBC Insurance | Yes | Term-10 can be exchanged for term-15, term-20, or term-30 | Before year 5 | Yes | Yes |
Sun Life | Yes | Any shorter term can be exchanged for another term that is at least 10 years longer than the current term | Before year 7 | Yes | Yes |
TD Insurance | No | ||||
UV Insurance | Yes | Any shorter term can be exchanged for a longer term | Before year 5 | Yes | Yes |
By reviewing the options in this table, you can identify which insurance company best meets your needs for a term life insurance extension.
Alternatives To Exchanging Your Term Life Insurance
If exchanging your term life insurance policy isn’t feasible or the most suitable option, several alternatives can help you maintain adequate coverage. Here’s a breakdown of these options:
Renewal
If you’ve passed the exchange privilege period, typically the first five years for most insurers, you can renew your policy at the end of its current term if you still require coverage. Insurance companies offer varying renewal structures. Some provide a fixed renewal rate that lasts for the duration of the initial term. For example, a term-10 policy might have a level premium for the first 10 years, a higher level premium for years 11-20, and so on.
Other companies offer a yearly renewable term, where premiums increase annually. While the initial premium jump may be more significant with a fixed renewal rate, yearly renewable terms tend to start with lower renewal premiums, making them more manageable for short-term extensions.
Here’s an illustrative example comparing monthly premiums for a $500,000 term-10 policy for a 35-year-old male non-smoker between two companies:
Year | Company A | Company B |
|---|---|---|
1 to 10 | $23 | $22 |
11 | $127 | $68 |
12 | $127 | $82 |
13 | $127 | $91 |
14 | $127 | $101 |
15 | $127 | $111 |
16 | $127 | $124 |
17 | $127 | $137 |
18 | $127 | $152 |
19 | $127 | $168 |
20 | $127 | $187 |
As the table shows, there’s a massive jump in premium for Company A in year 11 compared to the first 10 years, whereas Company B’s premiums increase more gradually. However, note that by year 17, the monthly premium for Company B overtakes Company A’s. This suggests that renewing might be a good option for only a few years before you explore other alternatives.
Replacement
Cancelling and purchasing a new plan is the best alternative if your term exchange privilege has expired and you still need a longer-term policy.
Assuming you have maintained your health and continue to lead a low-risk lifestyle compared to when you purchased your initial policy, you might qualify for new coverage at standard rates. However, if your health has declined, a new policy may be rated—meaning the insurance company would charge a higher premium to account for the increased risk—or you might even be declined coverage.
If you’re considering replacement, it’s essential to consult with an insurance advisor about your insurability. Also, make sure the new plan is in force before cancelling your old one; the last thing you want is to cancel your existing policy only to find out that you don’t qualify for new coverage.
Converting to a permanent life insurance policy
If what you really need is not just a longer term but coverage that lasts a lifetime, converting your term insurance policy to a permanent one might be a viable option.
Unlike term insurance, permanent life insurance offers benefits beyond just a death benefit. It can help pay for final expenses like funeral costs, cover the tax burden that might be owed upon your death so that your loved ones can inherit your estate intact, leave a legacy to family or a charity, or even serve as a tax shelter for your investments.
Like the term exchange option, you can convert your term policy to a permanent one without having to undergo additional medical underwriting. This makes it a practical choice if you want lifelong coverage and the additional benefits that come with permanent life insurance.
Need To Extend Your Term Life Insurance Policy?
In summary, a term exchange can be a strategic move to extend your term life insurance policy without the need for additional medical underwriting. It offers you the flexibility to adjust your term plan as your financial situation and needs change. However, it’s crucial to weigh the benefits against the potential downsides, such as limited exchange windows, irreversible changes, and specific policy restrictions.
If you’re unsure whether a term exchange is the right option for you, we’re here to help. For a free, no-obligation consultation, email us at info@briansoinsurance.com or call 604-928-1628. We provide comprehensive comparisons with other insurance companies to ensure you obtain the best coverage for your needs. Beyond just selling insurance, we offer ongoing support to ensure your policy continues to align with your evolving financial and personal circumstances.
We can also design a complete insurance solution—including term and permanent life, disability, health & dental, and critical illness insurance—to protect you against all of life’s risks. You can also use the form below to receive a term life insurance quote delivered straight to your inbox.
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While we make every effort to keep our site updated, please be aware that timely information on this page, such as quote estimates, or pertinent details about companies, may only be accurate as of its last edit day. Brian So Insurance and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser. This post is a brief summary for indicative purposes only. It does not include all terms, conditions, limitations, exclusions, and other provisions of the policies described, some of which may be material to the policy selection. Please refer to the actual policy documents for complete details which can be provided upon request. In case of any discrepancy, the language in the actual policy documents will prevail. A.M. Best financial strength ratings displayed are not a warranty of a company’s financial strength and ability to meet its obligations to policyholders.
