Can You Extend Your Term Life Insurance Coverage?

Term insurance is the most popular life insurance product due to its low-cost and simplicity. However, the downside of term insurance is the coverage is only for a set period of time. When you buy a 20-year term life product, after 20 years you no longer have coverage…Or do you? There are 3 common ways you can extend you term coverage beyond the original period. They are:

• A Term Conversion Rider¹ to convert to permanent insurance
• Post-Level Term² Annual Renewable Term to keep purchasing coverage 1 year at a time
• Stack Another Term (“Term Ladder³“) by purchasing a brand new term policy

Your need for insurance coverage changes as your life changes. Knowing the ways to extend out your term coverage can help you adjust if your financial plan changes.

Having adequate life insurance coverage is vital to your personal finances. And life insurance is the main component of the Protection pillar of the 5 Pillars of Personal Finance.

What Is Term Insurance?

Term insurance is a type of life insurance that has a pre-determined coverage period. During the coverage period, you typically pay level (flat) premiums. If you die while the policy is in good standing, your beneficiary will receive the death benefit. Since there is a pre-determined coverage period, term tends to be the lowest cost life insurance option available.

However, if you don’t die during the coverage period, you get no payments from the policy. Additionally, there is no cash value or any return on your premiums. The lack of cash value and limited coverage period help keep the price of the policy cheap, but are a major discomfort for many people.

With term insurance there is a chance you pay premiums, your policy matures, and you die without the coverage. This is good news as it means you lived long. However financially, many people feel like it was a ‘waste’. Luckily there are 3 ways to extend your coverage.

Why Would You Want To Extend Your Coverage?

People often purchase term insurance for a specific need. For example,

• Buy 20-year term when a child is born to have coverage till they are college age
• Buy 30-year term to ensure your mortgage can be paid off by your surviving spouse
• Buy 10-year term to bridge the coverage gap till retirement benefits kick in

However, as you are getting near the end of your level pay period, your needs may have changed. And you may need more years of coverage out of your policy than what you originally purchased.

Also, many people want to leave money to their children when they pass. Insurance is often a tax-efficient vehicle for estate planning. Extending your coverage may assist with your estate planning.

Thankfully, there are ways for you to extend your term life insurance coverage.

[Professor B.T. Effer Note – Both the post-level term and term conversion rider options are features on products. Some term insurance products don’t have these options. Usually, when you go through online and/or a simplified underwriting process you may not have these features.

We recommend you ALWAYS look for a term policy with both these features. The price of the features is miniscule relative to the flexibility they give you. Your policy documents or insurance company/agent will tell you if they are available.]

How Can You Extend Your Term Coverage?

There are 3 common ways to extend your term coverage.

• Term Conversion Rider – A term conversion rider allows you to convert your term policy into a permanent policy. A permanent policy will cover you until your death as long as you continue paying the required premiums.
• Post Level Term / Annually Renewable Term – After your level term period expires, you continue to purchase 1 year renewable term policies at increasing premium costs. Since the premiums are no longer level, it is “post-level term“. If you buy a 20-year term policy, starting in year 21 you would have the ability to buy 1-year term each year at higher costs.
• Buy A New Term Policy – Although not technically extending your current term product, often buying a new level-pay term product is a cheap option. The term life insurance ladder is a good example of stacking policies to optimize coverage.

What are the Pros & Cons of Extending Your Term Coverage?

Each of the 3 term extension options come with a list of pros and cons.

One downside of any extension option is you are almost always going to pay a higher premium. Insurance companies need to pay out the benefit amount on your policy if you die. The older you are, the higher probability you will die sooner. Hence, a higher cost to you.

Term conversions and post-level term have the benefit of allowing you to keep your current underwriting class. Since most people see their health get worse as they age, you likely have a healthier risk class when you purchased your original term policy. This is a major benefit of these 2 options.

The 3 options also give you 3 different lengths of coverage extension at different price points. Post-level term is a shorter extension, a new policy is medium-term, and a permanent policy is a long-term extension. This flexibility will allow you to choose what best fits in your financial plan.

What Term Coverage Extension Option Is Best For You?

When choosing between the 3 term coverage extension options, you should consider how long you want to extend the coverage.

• Longest = Term conversion to permanent policy – Permanent insurance is for life if you pay your scheduled premiums on time. Depending on the carrier and the conversion rider you have, you can choose an array of permanent policies.
  • You can’t outlive a permanent policy, so converting is ideal if you want coverage for life.
  • Additionally, most riders allow for partial conversions, so you can convert to a lower coverage amount. Often, people will use the partial conversion option if they want a permanent policy just to cover funeral expenses.
• Shortest = Post-level term – Annual renewable post-level term allows you to purchase 1-year term policies. If you are only looking to extend your coverage a few years, this may be the right option for you. Be aware that each year your premium will increase in the post-level period.
  • This option is ideal for bridging a coverage gap for a few years
• Medium = Buying a new term policy – if you are looking for a medium term option, you can purchase a brand new term for the coverage period you want. Most insurance companies offer 10 & 15-year term options.

The Final Word – Term Coverage Extension Options

You purchased term insurance when you were young as part of your personal financial plan. Now you are older and you would like to extend the coverage for longer. You now know 3 different ways to extend out your insurance coverage. You can:

• Convert your term policy to a permanent policy,
• Enter into the post-level term period and use annual renewable term, or
• Purchase a new term policy with the coverage length you need

The pros and cons of each option help you to choose the option that best fits your new needs. We highly recommend everyone own some 30-year term with a conversion rider as their first life insurance product. This gives you a long coverage period for fixed, low-cost and future flexibility. (Assuming you purchase a product with both post-level & convertibility options.)

Additionally, stable premium expenses help with budgeting. And the options allow you to adjust later as your needs change.

Frequently Asked Questions – Term Coverage Extension