Each year millions of Americans will see an increase in their term life insurance bill. But, before we address possible solutions, let’s take a look at the problem:
Term Life insurance is usually sold as Ten Year Term, Fifteen Year Term, Twenty Year Term or Thirty Year Term. At the end of the “term” (the length of time where the annual cost of the insurance is guaranteed to stay the same) the premium increases. For example, a 35 year old man who buys $1,000,000 of Ten Year Term might pay an annual premium of only $400. When the ten years expires, the premium could increase to $1,200.
The reason for the premium increase isn’t “all insurance companies are evil.” It was simply the deal made between the insurance company and the consumer, which goes something like this: “Hey consumer, we’ll charge you a ridiculously low insurance premium for ten years, and then a ridiculously high premium after that. You interested?”
You might wonder how the insurance company can charge such a low price, and why they raise it so high. They charge the low price because the consumer just took an insurance physical, giving the insurance company a very good look at the consumer’s physical condition and probable life expectancy. They charge the high premium after ten years because time has passed, who knows how the consumer is doing now, and the insurance company wants you to drop the coverage.
Okay, so if your term insurance is increasing, you have four choices:
1. Pay the higher bill. No joke. If the policyholder is terminally ill, with a life expectancy under two years or so, it makes financial sense to pay the bill because at death there will be a large tax-free pay out.
2. Don’t pay the premium and let the insurance lapse.
3. Go shopping for new insurance. If you are healthy you’ll probably get a low rate and it’ll all be fine. We recommend shopping in every case. At the very least you can see what a new policy is going to cost.
4. Convert your term policy to “Pemanent Insurance.” Most term policies allow you to switch to a Permanent Policy — and there is no insurance exam and no medical questions. You simply sign some paperwork and the insurance company offers you a new policy. The premium will be higher, but if your health isn’t good and you might have trouble getting a new insurance policy, then this is the best option for your situation.
There are times when your insurance policy doesn’t actually increase that much. Even in these cases, I would still recommend checking the pricing for a new policy. In most cases, getting a new insurance policy is going to be cheaper than keeping a term policy after the guaranteed years or term of the policy are over.