Table of contents
Is your term insurance about to expire? Did you know that if you renewed it, your premiums are going to be 3-20 times more expensive?
What if I told you there was a better option than renewing it?
One that will let you maintain your coverage while keeping premiums affordable?
In this post, I’ll walk you through the options you have when your term insurance is about to renew and show you the one that will save you the most money.
Let’s get started.
What Is A Term Insurance Renewal?
When you were younger and starting a family, you likely bought term insurance to protect your family. It’s the most affordable type of insurance to cover debt and replace your income.
Compared to whole life insurance, you’re saving a lot for the same amount of coverage.
For example, a $500,000 term-20 policy for a 35-year-old male non-smoker only costs $33.30/month. The same coverage with a whole life policy costs $322.20/month, or 10 times more!
But if you read the contract carefully, you’ll see that the low cost is only guaranteed for the first 20 years. After that, your policy renews at a higher premium. In this case, the premium skyrockets to $560.7/month!
So you don’t have to break out the calculator, that’s 17 times more than what you paid in the first 20 years!
What happens when you renew your term insurance?
When you buy term insurance, your premium is guaranteed not only in the initial term, but also in all subsequent terms. That means from the beginning, you know how much the term-20 policy costs from years 1-20, 21-40, and so on.
The problem is that the renewal premium is much higher than in the initial term. So much so that it doesn’t make much financial sense to renew it.
That’s why when you buy term insurance, you want to make sure you choose a term that is the right length. Pick a term too short and you risk having to renew it at the higher premium.
How much higher? Take a look at what the 35-year-old male non-smoker has to pay after 20 years.
Years | Monthly premium |
|---|---|
1-20 | $33.3 |
21-40 | $560.7 |
41-50 | $2,252.25 |
Do you have to medically qualify to renew your term insurance policy?
One of the benefits of renewable term insurance is that you don’t have to medically qualify for coverage when it renews. This means you don’t have to answer any medical question or go through a medical exam.
Instead, all you have to do is pay the higher premium.
So even if your health deteriorates, you still have the choice of renewing your policy.
What types of term insurance can be renewed?
The most common term policies are 10 and 20 years. Some insurance companies also have terms of 15, 25, or 30 years to increase their product offerings. Nowadays you’ll even find a few that have every year in between 10 to 40 years. Want a term-27 policy? Yes, you can get that too.
You can renew all these policies up to a certain age.
However, there are some types of life insurance with the name ‘term’ in them that don’t let you renew. These are term-65 and term-100. The former expires at age 65 while the latter is actually a type of permanent insurance and doesn’t expire.
Does term insurance expire?
Using our first example, the term insurance technically doesn’t expire at age 55. People may call it expiring, but the correct terminology is renewing.
You can renew the term-20 policy for another 20 years from 55-75 and then once more from 75 to the maximum age the insurance company allows (usually 80 or 85).
In the unlikely event you kept renewing that long, that’s when your coverage officially expires.
What happens when you outlive your term insurance?
While outliving the term is great, the sticker shock of the renewal premium isn’t. If you’re still working, you might be able to stomach the increase. If you’re retired, there’s no way you want that added cost.
So, besides renewing the policy at the higher premium, what other options do you have?
That depends on a few factors:
- Your financial situation
- Your insurance needs
- Your health
Your Term Insurance Renewal Options
Besides renewing your policy, you have 4 options to choose from. Below, we’ll go over each of them, their pros and cons, and help you figure out which one you should choose.
1. Renew the policy and reduce the coverage
Chances are, your financial situation has changed since you first bought the policy. Your children are older, you’re closer to retirement, your debt level is lower, and your savings have increased. Overall, you should be in a better position financially than you were 20 years ago.
Why does that matter? Well, your life insurance needs are based on your financial situation. If you’re in a better financial situation, you don’t need as much life insurance.
That means instead of $500,000 of life insurance that you had in the first 20 years, you might be able to reduce it to $250,000 or another amount. Use a life insurance calculator to quickly find out how much coverage you need.
While you’ll save some money with this option, you shouldn’t choose this if you’re still in good health. Instead, take a look at option #2 below.
2. Apply for a new term insurance policy
You might be wondering why the premium increases so much when you renew your term insurance. One of the reasons is due to your age. The other is that the insurance company expects that people in poor health will renew. These people would have a hard time qualifying for a new policy and so they have no choice but to renew.
What do people with good health do instead? They buy a brand new term policy.
Going back to our example, the 55-year-old would pay $229.05/month on a brand new term-20 policy at standard rates. Compared to the $560.7/month that he would’ve paid had he renewed the original policy, he’s saving almost 60% or $80,000 over the next 20 years!
You’ll want to get the process started on applying for a new policy at least a few months before your current policy renews. This gives the insurance company time to underwrite you to determine if you can qualify for standard rates. If you’re declined or your rates are too high, at least you can still fall back to option #1.
3. Convert to permanent life insurance
Unlike term, permanent life insurance lasts a lifetime. It doesn’t matter if you die at age 60, 80, 100, or older, the policy will pay out a claim as long as you keep paying the premium.
But why do you need permanent life insurance in the first place?
As mentioned above, your financial situation changed since you first bought the insurance. In addition to covering final expenses, you can also use permanent life insurance for estate planning purposes. These are higher on your priorities now that you’re older.
Here’s what estate planning with permanent life insurance looks like:
- Covering taxes upon your death
- Donating the proceeds to a charitable organization
- Equalizing your estate among your children
And more.
The best part? You can convert your expiring term insurance into permanent insurance, without providing evidence of insurability!
That means even if your health and lifestyle got worse over the years, you can still convert your policy, no questions asked.
4. Cancel your policy and self-insure
What happens when you no longer have a need for life insurance? You cancel your policy, of course.
You can consider this option if you’ve accumulated a lot of wealth and don’t need insurance anymore to protect your family. This is called self-insurance.
Self-insuring doesn’t mean your family won’t suffer financially if you pass away. Instead, it means that it can continue its lifestyle by using the money you saved up over the years.
Before you go ahead with this step, you should keep the following in mind:
- Make sure you’ve saved up enough money. There’s nothing worse than thinking you’re fully self-insured only to find out the opposite when it’s too late.
- If you change your mind after canceling, you can reinstate your policy but you have to submit evidence of good health.
- After reinstating it, the suicide clause begins again. That means there is no payout if you commit suicide within 2 years of reinstatement.
- Canceling life insurance shouldn’t be taken lightly. Instead of doing this, you should consider option #3 and get a permanent policy that forms a part of your estate plan.
What Should You Do With Your Term Insurance Policy When It Renews?
Here are the action steps you can take to determine your best course of action:
1. Dust off your old insurance policy and check the renewal date. It should be on the first few pages alongside information like your coverage amount and beneficiaries.
2. Do a checkup of your current financial situation. It’s like a medical checkup except without needles. You’ll want to gather these pieces of financial information:
- Your income
- Your assets (RRSP, TFSA, principal home, savings, non-registered investments, real estate, and more)
- Your liabilities (mortgages, loans, estimate of taxes owing at death)
3. Assess your medical history, current health, and lifestyle. This will help you determine whether it’s possible to buy a new policy and if so, at what rates.
4. Determine how much coverage you need and for how long. Get a few quotes to compare.
5. If you are going to cancel your expiring term insurance policy, you need to notify the insurance company, especially if your bank account is debited monthly. The insurance company is more than happy to continue to withdraw funds and assume you accept the renewal unless told otherwise.
Going through those steps above allows you to decide which of the options is most suitable for you.
Final Thoughts
Do you have a term insurance policy coming up for renewal?
What are you going to do with it? Renew and reduce? Conversion? Or one of the other options?
Let me know what you decide to do in the comments below.
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.
Hi Brian,
Converting term insurance to permanent insurance (whole life insurance) vs taking a new permanent policy which one makes sense?
You said it may be cheaper to obtain a new term policy vs renewing existing term policy if one is in good health. Will the same principle apply if you want to convert term to permanent policy?
Thanks
Hi Maclean,
Converting makes more sense if your health has declined and made you unlikely to qualify for insurance at the standard rate. However, you may not like the permanent insurance options provided by your current insurer, in which case you may buy a new permanent policy with a new insurer, health permitting.
Converting will cost the same whether you buy a new policy or convert your term policy.
Cheers,
Brian