Knowing What Happens at the End of Term Life Insurance
Term life insurance is an excellent option for minimizing premiums as much as possible without shrinking the size of death benefits. Compared to whole, universal, or permanent insurance, they do not carry the same weight of responsibility and commitment. For many insurance-seekers, this means a greater level of comfort with the idea of coverage under contract. After all, the contract is certain to reach a stopping point.
At the same time, this can be a source of confusion. Some insurance applicants are still unsure about the meaning of the term, especially with what happens at the end of term life insurance policies. To understand, it can help those shopping for a low insurance premium with the highest possible death benefits to look at the bones of the policy.
Term life insurance is designed in a specific way to both lower the monthly cost of maintaining the insurance and keep the level of guaranteed benefits as unchanged as possible. They attempt to reach a compromise between the insured and the insurance company.
Read on to see how these designs work, and see the options available to those who sign off on this kind of insurance contract.
Understanding the Elements of Term Insurance
Several ideas are important to understand before agreeing to a term life insurance policy in order to cut out surprises. Some of the key topics concern statistics about when the insured is most likely to pass away and the chances that the insurance company will be compelled to pay benefits. Others concern the lowering of the monthly costs as well as the simple duration of the agreement.
Insurance companies use statistics and mortality tables to estimate the number of years a certain person has left to live. Using these estimates and remaining years, they determine a rate for the individual. That’s why younger applicants get lower rates and why it makes sense to get insurance sooner rather than later.
When you realize that life insurance companies consider a huge range of statistics and people in order to arrive at their unique quotes and premiums, it makes sense that these rates of mortality factor largely in policy design. Even though there really is no true way of predicting who will die at any given time or at a certain age, insurers make informed predictions in order to form their premiums and potential payouts.
Given that a younger person is less likely to activate a policy’s death benefit payments, there is a better chance that the insurance company won’t need to give payouts at all. For them, it makes sense to structure premiums based on a lower probability as well. In fact, for term policies, the number of cases in which payouts are required is very low and in the range of single digits.
This is vastly different from permanent insurance which, as long as it is active, is guaranteed to result in an insurance payment to beneficiaries. Term policies simply do not last forever, and because of this, they can cut premiums in important ways because the insurers see that they assume very little risk of love money.
Premiums are lower with term insurance. In part, this is from a lower potential for actually resulting in payments. But, it also gets lowered because of a lack of built-in insurance features available from permanent, whole policies. Policyholders with term insurance can’t withdraw benefits during life or accrue interest over time.
As discussed, permanent policies are indefinite and continue until the policy benefits are triggered by the death of the insured. When this happens, the insurance company pays the agreed amount (plus potential cash values and interest). On the other hand, term policies aren’t guaranteed to pay out because they are structured temporarily.
Despite that term policies are designed to come to a determined end, many policyholders decide to keep the policy or convert it into another kind of policy at the end of the term. In effect, term policyholders have several options for what happens at the end of term life insurance policies.
At the end of the term policy, the insured actually has many more choices than to simply accept the idea that they are no longer providing protection to their beneficiaries. Instead, they can elect for one of the following options:
- Let it lapse.
- Keep the policy.
- Make it permanent.
- Replace policy.
When the policy lapses, premium payments are stopped. No further premiums at a higher rate can be charged. But, they can also keep making payments at a much higher rate to keep the policy’s financial backing. Beyond this, many choose to convert its format into a permanent plan with new premiums as well. Those who are still relatively young also go back to the market to get quotes on a fresh policy.
Shop for Term Life Insurance with Sproutt
The end of a term policy can conclude a chapter of coverage, or the story can go on through continuing premiums and converting to a permanent insurance plan. Either way, insurance-seekers can try Sproutt to shop for the best quotes on term life insurance now that they know what to expect.