Term life insurance provides valuable coverage at an affordable price and can help cover specific financial responsibilities, like a mortgage. This simple solution to your family’s peace of mind also comes with some valuable information to be aware of.
What is the grace period for paying a bill?
Your policy typically has a 31 day grace period. This means that if a premium is not paid on or before the due date, it may be paid during the 31 days following the due date.
During the grace period, the insurance will stay inforce (active) but if a claim is made the premium owed may be deducted from the benefit amount payable to your beneficiary.
» Compare: Term life insurance quotes
What happens to my premium at the end of my term policy?
The premiums you pay are set at the beginning of your coverage and are guaranteed to remain the same for the term length you selected regardless of any changes to your health or financial status. If you outlive your term policy, you do not get your premiums refunded, unless you have purchased a return of premium term policy.
Renewable Term Life Insurance
Most term policies have a renewable clause built into it. What this means is that you can renew your policy without having to go through medical underwriting again.
This is beneficial for individuals who may have developed a health issue along the way and would be deemed uninsurable otherwise. However, your premiums skyrocket if you go this route. For some people, it’s worth it.
Overall, we typically recommend you instead convert to a permanent policy or apply for a new term policy altogether.
Converting Term Life Insurance
Most insurance carriers provide an option called term conversion which allows you to convert your term policy to a permanent plan of coverage possibly locking in a premium amount for the rest of your life. The new premium would be calculated based upon your current age and coverage duration.
Conversion does not require a new medical exam and can’t be affected by any change in your health. The conversion option needs to be exercised before you reach a certain age or term year, as stated in your policy.
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Is term life insurance taxable?
Term life insurance is not taxable if the death benefits are payable to a named beneficiary (a real person). However, there are several situations where term life insurance proceeds may become taxable:
- Estate named as beneficiary: The death benefits proceeds may be considered part of your estate and could be subject to federal or state estate taxes.
- Third party ownership: This occurs when a person (the policy owner) buys a policy on another person (the insured) who then designates another person as the beneficiary. For example, if a parent buys a policy on their child who then designates his or her spouse as beneficiary. The spouse could be seen as receiving the insurance proceeds as a gift which might be taxable.
When in doubt, we recommend that you consult with your tax advisor about any potential tax implications. Policyowners can adjust beneficiaries as needed.
» Learn more: How Life Insurance is Taxed
What is a contestability period?
Most life insurance policies have a two-year contestability period. This means during the first two years after the issue of your policy, if it is found you misrepresented information on your application, the insurance company can cancel your coverage or deny a claim.
Because the cost of premiums for life insurance is based on your age and medical history, some people may intentionally misrepresent certain aspects of their health and lifestyle, such as hiding facts related to a hazardous occupation, risky hobbies, or unhealthy habits.
Also during the first two years of your policy the insurance company will not pay the death benefit in the event of a suicide. After the two-year period has passed, the policy will pay out even if the cause of death is suicide and any non-fraudulent misrepresentation had been made.
» Learn more: Clauses and Exclusions: Things to Know About Your Policy
About the writer
Natasha Cornelius, CLU
Senior Editor and Life Insurance Expert
Natasha Cornelius, CLU, is a writer, editor, and life insurance researcher for Quotacy.com where her goal is to make life insurance more transparent and easier to understand. She has been in the life insurance industry since 2010 and has been writing about life insurance since 2014. Natasha earned her Chartered Life Underwriter designation in 2022. She is also co-host of Quotacy’s YouTube series. Connect with her on LinkedIn.