Life insurance is very critical in financial planning. Having the right life insurance policy will serve as strong protection when you need it the most. But have you ever stopped to imagine what happens when you outlive your life insurance policy? If you don’t have the answer to this question, there is a big problem you need to solve.
Not knowing the next step to take after your life insurance policy matures will leave you open to possible loss. Ideally, the death benefits on your life insurance should be paid to your beneficiaries after you pass away. However, the opposite shouldn’t be the case if your policy matures and you’re still alive. You have spent a lot of time, efforts, and money maintaining a life insurance policy over the years, you shouldn’t lose it all because you’re misinformed on the right steps to take.
Although not knowing what to do when you outlive your life insurance policy is a problem, we have just the solution for you, actually many solutions. Depending on what type of life insurance policy you have, here is what to expect and the actions you should take if you outlive your policy.
Key Points
- Even when you don’t die before your life insurance policy expires or matures, you can still get some value out of it.
- You can convert, extend, or renew a term life insurance policy when it expires.
- You will get the full death benefits of a whole life insurance policy when it matures.
- To get guaranteed money back when a life insurance policy ends, you should consider policies like the return of premium term life insurance because they have a maturity benefit.
What Happens To Your Term Life Insurance If You Don’t Die
If your term life insurance contract has expired and you’re still alive, we want to heartily congratulate you for making it this far in life. It’s great to have insurance for when you need it but it’s a relief to not have to use it. If you’re asking what happens when you outlive your life insurance policy, you’ll be glad to hear there are varied options for handling a term life insurance that is about to end or has expired.
Term life insurance can be quite flexible. Although your low premium payments will expire after term, the entire policy doesn’t have to ‘expire’. Typical term periods are 10, 15, 20, 25, 30, and 35 years. Whichever option you started with, you can continue with the policy on an annual basis until you reach age 95. However, premium payments will significantly increase with each new year. Upon term expiry, if you find that you still need life insurance coverage after evaluation, you have the option to extend, convert, or renew your contract.
Extend It
Most term life insurance contracts have a handy feature called guaranteed renewability. This feature will let you extend your policy without having to undergo a fresh underwriting process plus medical exams. If you choose this option, the insurance company will grant you an extension after reviewing your premium payment upwards. Although premium costs will significantly increase with this option, it is a great choice if you only need a few more years of coverage.
Convert It
Most term life insurance contracts also come with a conversion rider these days. This allows you to change your term life insurance policy to a permanent life insurance policy upon expiry without needing a new medical examination. If you chose this option, you will have to be time conscious about the conversion and know what options you can convert to. You don’t need to prove good health for conversion so it is perfect if you have health issues but you may not get the juicy features you most want from the new permanent life coverage.
Renew It
The type of coverage you bought 15 or 25 years ago might not be the type you need now. If you have a bigger family, you will need more coverage. If you have more savings you will need less coverage. The end of your term life insurance contract presents the perfect time for you to get a new policy that is more befitting and relevant to your current situation. This is the most cost-friendly option for policyholders under 70 years but you have to prove good health or your cost savings will drop.
Other Options
- Sell it: you can sell your term life insurance to get some money back before it expires. This agreement, also called a viatical settlement, could make sense in extreme situations. However, since the value of your policy depends on how much time you have left on the contract, you might not get much money back if you sell close to the end. There are many downsides to selling your term life insurance towards the end of the policy, but it is still a viable option.
- Combine Small Policies: If you have some health challenges that could make it impossible for you to buy a term life insurance policy with a big coverage, you can combine several smaller policies to cover your needs. Many of these policies don’t demand a medical exam but they will surely ask questions about your health status. Take note that insurance companies will check to see how many insurance policies you have. If they believe the amount of coverage you already have is sufficient, they won’t give you more. After buying a few smaller policies from insurance companies, you can also take advantage of the group life insurance package offered by your employer.
What Happens When You Outlive Your Whole Life Insurance
Unlike term life insurance, which has an expiry date after a stipulated number of years, whole life insurance is designed to cover for your ‘whole life’. This description leads people to believe that whole life insurance policies have no end, but on the contrary, they do. Truthfully, whole life insurance does not cover your entire life, just most of it, and it will mature after a certain date. Some whole life insurance policies mature after 95 or 100 years while others extend to up to 120 years. So what happens when you outlive a whole life insurance policy? Understanding this is very important in reviewing how your policy works.
How Does It Work?
The regular premiums you pay on your whole life insurance policy are divided into two parts; the cost of insuring you and cash value. Although you will keep paying the same premium throughout the term of the policy, a larger part of that payment will be allocated to insuring you as you grow older. This is because the risk of your death increases as you grow older. If you don’t die before the stipulated maturity period, the cash value of the policy will be reimbursed to you. Upon maturity, that cash value will be equal to your death benefits or the amount you were covered for.
Sounds great, doesn’t it?
You get a huge chunk of cash and you get to celebrate that you’re still alive! Before you go off and celebrate, consider the ‘but’ in this situation. Your life insurance is not taxable as long as it remains an insurance product. However, upon the contract’s end, it becomes a disbursement and most of it is taxable. Given a large amount of many death benefits, the taxes will probably be high.
How To Get More Out Of Your Whole Life Insurance Policy
If you don’t want to collect cash value at the end of your policy and pay taxes on them, you can do the following:
- Invest the cash value: different types of whole life insurance, like variable life and universal life, allow you to make investments. You might be allowed to adjust the death benefit value and make high growth, high-risk stocks. Although this can be beneficial in terms of profit, you must note that it can reduce the value of your death benefit.
- Buy a maturity rider: your insurer might offer maturity extension riders for whole life insurance policies. This rider helps to keep your money as an insurance product until whenever you die. Although you won’t be paying extra premium after maturity, your death benefit will remain the same and you will also get accumulated interest for the duration of the extension.
Can You Get Money Back When Your Life Insurance Matures
Many people don’t know that life insurance contracts provide other benefits outside disability and death benefits. You won’t get any paybacks with traditional term life insurance but there are ways to get money back when your contract expires or matures. Life insurance policies with maturity benefits are the key. If you want to enjoy maturity benefits on your life insurance policy, you should consider taking out one of the following options.
Endowment Plan
This plan combines life insurance with investment. The pool of funds gathered is typically invested in debt funds. This makes the risk of investment extremely low and the returns equally low. The assured death benefit sum in this type of plan is also not very high.
Unit Linked Plan
This plan is similar to the endowment plan where funds are used for investment as well as insurance. The plan is linked to the market and the insured can make financial investments with their premium. The risk for these investments is higher and the policyholder also has to pay some charges but the policyholder will have equity exposure to grow wealth faster. With this plan, you may also be allowed to make small withdrawals to help you deal with pressing financial issues when they arise.
Return Of Premium Term Life Insurance
If you don’t want to crack your head about what happens when you outlive your life insurance policy, get an insurance policy that guarantees a return of premium. This type of life insurance is not widely known but it’s a great way to get your money back when your life insurance policy expires or matures.
When you buy a term life insurance policy, you can elect to add a return of premium rider. This rider guarantees that you get your premium back if you outlive your life insurance policy. Take note that adding this rider can double your premium payments. You must consider if recovering your money at the end of the contract term is worth the double premium and if your budget can accommodate the higher cost.
If you still need some help deciding if a return of premium term life insurance is a good fit for you, consider the following points.
- This option will significantly increase your premium payments. If you are still young and healthy, the increase can reach 30% of the regular premium. If you are above 40 years and have health issues, the premium can double or even triple.
- You have to be sure you can afford the policy because you risk losing all your paid premiums if you miss one payment.
- The full premiums paid during this life insurance policy will be paid back to you and none of it will be taxable.
- If you’re a savvy investor, you could get more returns on your investment if you handle them yourself. This means it might be better off for you to buy a traditional term life insurance policy and personally invest the extra you would have paid for a return of premium rider.
- If you have a buy/sell agreement with your business partner, the return of premium rider is an excellent way to afford the buyout if your partner dies.
- It is also an excellent choice for divorce cases where one party is obligated by law to take out an insurance policy. The obligation is fulfilled and all premiums will be returned if any or both partners outlive the term.
Takeaways
Have you ever wondered what happens when you outlive your life insurance policy? A life insurance policy is supposed to pay a death benefit upon your demise. However, some people beat the odds and live longer than the tenure for their life insurance contracts. Since you did not die, you should not be getting any death benefits from the contract. Fortunately, you don’t have to let go of all the premiums you’ve paid for years. Whether you have a term or whole life insurance policy that is about to expire, there are different options to explore.
If you’re going for term life insurance, we advise that you choose a longer-term if there isn’t a reason to end the policy early. This will help you lock in low premium rates, especially if you’re young and healthy at the start of the life insurance contract. If you’re going for whole life insurance, make sure to carefully read and understand the terms of the agreement so you can make the most out of your life insurance policy while it is in force and when it reaches maturity.