Term Life Insurance Explained

What Happens at the End of Term Life Insurance?

Term Life Insurance is a way to get a large amount of death benefit coverage while keeping the premiums relatively low compared to permanent life insurance policies such as Whole Life and Universal Life.

There are a few factors that go into the design of a life insurance policy:

  1. Mortality rates
  2. Chances the policy will have to payout a claim
  3. Accessibility of the premium dollars
  4. Reserves
  5. Policy Duration

Mortality Rates

Being that life insurance is designed to payout a death benefit were the insured to pass away, logic would dictate that the premiums of a life insurance policy would be based on mortality rates. For this reason younger and healthier people will pay less than older and unhealthy people. Simply because statistically older and/or unhealthy people have a higher mortality rate than their younger, healthier counterparts.

Additionally, as a person ages, their mortality rates rise with them. There is a much higher chance of dying at age 75 than age 25 for example. Does that mean that no 25 year olds die? Unfortunately, it does not. However, the age of a person is a very strong indicator of how much longer they will live on a statistical basis.

Since Life Insurance companies deal with a very large number of people, they have the ability to, so to speak, play the numbers game. Meaning, they can say with fairly strong certainty that a certain number of people at any given age will die in any particular year.

The insurance companies and their actuarial departments of course do not know which person they are painting this bleak picture for, but from a statistical perspective, it gives them an idea. They can, therefore, calculate the cost of insurance for a group of people based on the mortality tables.

Any individual person, however, would be irresponsible to say, “I am young and healthy and only have an X percentage chance of dying and therefore do not need life insurance.” Because, no one actually knows who that one in a million, so to speak, person will be. So, if someone has a family and financial responsibilities, they would most definitely need to be responsible and purchase a life insurance policy, and the sooner the better.

Below are two opposite charts. The first chart shows mortality rates which rise as the person gets older. The second chart shows life expectancy which decreases with age.

All the data for this chart was taken from the CDC website and can be viewed by clicking here.

If you look closely, you’ll notice that at the very beginning the line dips a little. This is due to the slightly higher mortality rates for young children. The graph hits its floor between ages 10-11. In the following year, it starts slowly rising again.

Chances the Policy Will Have to Payout a Claim

As explained above, the chances of death during a person’s younger years are much lower than older ages, especially for adults. Because a typical term policy will stay in force during the younger adult years, chances are the death benefit will never have to be paid out.

In practical terms, the actual amount of term life insurance policies that are paid out is in the low single digits. Conversely, the amount of term policies that end without any benefit being paid to the insured’s beneficiaries is in the high ninetieth percentile.

Unlike term policies, permanent life insurance policies such as Whole Life and Universal Life policies are designed to last until the insured dies and will, therefore, always payout a death benefit. Barring of course policies that lapse for a myriad of reasons prior to the insured’s passing.

Accessibility of the Premium Dollars

Another factor that goes into play is the ability to withdraw your premium dollars during your lifetime. Similar to the difference between savings accounts and Certificates of Deposit (CDs) where the CDs offer a much higher interest rate due to the fact that you are unable to access your money for a specific period of time. The longer that time period is, the higher the interest will usually be.

Whole Life and Universal Life policies offer access to the cash value of the policies through loans and withdrawals. Term policies, however, do not have such an option, thus enabling the premiums to be considerably lower.

Reserves

Mortality rates are constantly rising, and it makes sense that the cost of insurance should always be on the rise as well. In other words, if a 25-year-old needed to pay $20 a month for one million dollars of insurance, they would presumably rise to say $21 when turn 26. At age 27, that should then be $22.50 and so on. In truth, such policies exist. They start out at the lowest possible cost because the premium rate is only fixed for one year and go up every year on a curve. So, the older the insured gets, the higher the cost rises.

This option exists both for term and permanent policy options. The term option is usually referred to as “Annual Renewable Term” or “Increasing Premium Term.” On the permanent side, if you look under the hood of a Universal Life policy, you can see the rising cost of insurance. However, most Universal Life policies that are properly designed will have the cash value component outpace the mortality rates in growth. (Or, at least, they should in a perfect world.)

However, most people do not want to have to worry about a constantly rising premium. They would rather have one stagnant premium every year for however long they have their policy. Thus, the creation of the “Level Premium.”

The mechanics of the level premium are, in the early years of the policy, the premium will actually be more than the cost of insurance or mortality rate. These extra premium dollars or “reserves” are then invested by the insurance company in order to cover the later years of the policy when the cost of insurance is higher than the premium being paid.

This option also exists in both the term and permanent life insurance sphere. The permanent option being Whole Life and the term option being the most commonly purchased “Level Premium Term.”

Policy Duration

When we look at the level premium options, being that Whole Life lasts forever, it actually illustrates until age 121, the premiums will therefore be a lot higher. The reasoning is, the reserve needs to be much larger to cover the later years of the policy.

This article discusses Whole Life Insurance at greater length.

A level premium term, however, only has a level premium for a set amount of time. The various life insurance companies offer different options. The shortest being a 5 year term and the longest is a 40 year term.

Contrary to common belief, after the level premium period of a term policy is over, most term policies do not end. Term policies usually last until ages 80 – 95, depending on the carrier. The caveat is that once the level premium period is over and the reserves have run out, the cost of the policy will rise tremendously as you will need to pay the pure mortality cost. The premium will also go up every single year, and it will be on a curve.

Another contributing factor to the steep rise in costs once the level premium period of a term policy is over is the adverse mortality aspect. When the level premium expires anyone who is healthy enough to requalify for a new term policy will probably do so. Thus, the only people who will keep the policy when the premiums start rising are the unhealthy individuals who would be declined a new policy. Due to their health status, the mortality rating of such a group of policies would be skewed in the negative direction. This point does not apply to an annual renewable term policy, thus the incline is not as steep.

In this chart, we compare the rising costs of the 30 year term and Annual Renewable term vs. the consistent level premium of a Whole Life Insurance Policy.

The following specifications were used:

  • $1,000,000 Death Benefit
  • 25 year old Male
  • Highest health rating
  • State of Pennsylvania

What Happens after Your Term Life Insurance Ends?

At the end of your level premium period, you have a few options:

  1. Let the policy lapse.
  2. Keep the policy.
  3. Convert the policy.
  4. Purchase a new policy.

Let the policy lapse.

If you no longer require a life insurance policy, then the most economical solution would be to allow the life insurance to lapse by stopping premium payments. This is also the default option, as the life insurance companies cannot charge you a drastically higher premium without your prior consent.

Keep the policy.

As discussed earlier, the premium will shoot up dramatically. Therefore, this option should only be used for someone who is very unhealthy, will not qualify for a new policy, and will very likely be needing the death benefit within a few years. If the policy is kept until natural expiration— somewhere around age 90 with most companies—you will likely end up paying more in premiums than the entire policy is actually worth.

The chart below illustrates the effect of keeping the policy with the rising premiums every year.

The following specifications were used:

  • $1,000,000 Death Benefit
  • 25 year old Male
  • Highest health rating
  • State of Pennsylvania

Convert the policy.

This option does not necessarily require waiting until the policy expires. On the contrary, it should probably be taken care of prior to policy expiration.

Many term life insurance policies have the ability to convert or upgrade the policy into a permanent life insurance policy such as Whole Life or Universal Life without being required to requalify for the new policy. Meaning, all you need to do is sign some paperwork and pay the new, higher premium for the permanent policy, and you are good to go.

It should be noted that not all term policies offer this ability, and even the ones that do, some only offer it for a certain time period like the first 10 years of a 20 year term policy etc. Many companies offer the ability to extend this privilege for an additional cost through the extended convertibility rider.

This is a very good option to have in case it may be needed one day, so it would be important to speak to your advisor to inquire about the convertibility of your term life insurance policy.

Purchase a new policy.

If you are in good health and will qualify for a new term life insurance policy, this would likely be the lowest monthly premium option. The fact that you had a policy until now has no bearing on the new policy.

FAQs

What happens after a 10 year term life insurance policy?

You will be presented with the following options:

  1. Let the policy lapse.
  2. Keep the policy.
  3. Convert the policy.
  4. Purchase a new policy.

Please read the article above for more insight.

What happens at the end of a term life insurance policy?

You will be presented with the following options:

  1. Let the policy lapse.
  2. Keep the policy.
  3. Convert the policy.
  4. Purchase a new policy.

Please read the article above for more insight.

What happens if I outlive my term life insurance?

You will be presented with the following options:

  1. Let the policy lapse.
  2. Keep the policy.
  3. Convert the policy.
  4. Purchase a new policy.

Please read the article above for more insight.

What happens when term insurance matures?

Depending on the type of term policy, there are different maturity levels.

For a typical level premium term policy (10, 20, 30, or 40 year term), what happens when a term life insurance policy ends is the level term period runs out. Then, you will be offered one of the following options:

  1. Let the policy lapse.
  2. Keep the policy.
  3. Convert the policy.
  4. Purchase a new policy.

Please read the article above for more insight.

What happens after 10 year term life insurance?

You will be presented with the following options:

  1. Let the policy lapse.
  2. Keep the policy.
  3. Convert the policy.
  4. Purchase a new policy.

Please read the article above for more insight.

What happens if you live past your term life insurance?

Depending on the type of term policy, living past your term policy can mean one of two things.

Either you lived past the level premium period which for a typical level premium term policy (10, 20, 30 or 40 year term for example) once the level term period runs out, and you will be offered the following options:

  1. Let the policy lapse.
  2. Keep the policy.
  3. Convert the policy.
  4. Purchase a new policy.

Or, you lived until the ripe old age into your nineties when the entire term policy likely expired. (Good for you!) Unfortunately, what happens after term life insurance ends completely is that it is most likely no longer possible to purchase a new policy at this point. But you probably don’t need it anyway.

Please read the article above for more insight.

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