Do you pay life insurance forever?
You can pay whole life insurance policies forever or over 10 to 20 years — it's your choice. But your monthly premiums will increase dramatically should you choose the latter option. The payment schedule you choose greatly depends on your affordability.
Most whole life policies endow at age 100. When a policyholder outlives the policy, the insurance company may pay the full cash value to the policyholder (which in this case equals the coverage amount) and close the policy. Others grant an extension to the policyholder who continues paying premiums until they pass.
A term life policy lasts for a specific period, typically from one to 30 years. During the term, the policyholder makes fixed premium payments in exchange for a guaranteed death benefit. Under a term life policy, coverage ends at the end of the term.
Term life insurance covers you for a set term while a permanent life insurance policy covers you for life as long as premiums are paid. Between the two, term life tends to be cheaper, but permanent life insurance can offer benefits such as cash value accumulation.
So when coverage expires, your life insurance protection is gone -- and even though you've been paying premiums for 20 years, there's no residual value.
A more complex product than term life insurance. Higher premiums than term life insurance.
In most cases your premium payments will be forfeited, and you will not receive anything for your previous payments. The one exception to this is if you have whole life insurance and cancel it. You may have built up equity for all of the payments you have made so you may receive a lump sum payment from your insurer.
However, most people receive around 20% of the face value on average, according to LISA. So, if we're using that 20% average to calculate the cash value of a $100,000 life insurance policy, the cash value of the policy would be $20,000.
The good news is that you likely won't need to worry about having a claim denied if you're truthful with your life insurance company from the start. Instances of lying, criminal activity, or dangerous behavior that's not disclosed upfront could all be reasons life insurance won't pay out.
When your term life insurance plan expires, the policy's coverage ends, and you stop paying premiums. Therefore, if you pass away after the policy ends, your beneficiaries will not be eligible to receive a death benefit.
What happens after 10 years of paying life insurance?
A 10-year term life insurance policy expires after the 10-year term length ends. If you don't pass away during this period, your coverage ends. This means that if you pass away afterward, your beneficiaries won't receive a death benefit.
How much does whole life insurance cost? A 30-year-old in good health could pay about $451 per month for a whole life insurance policy with a $500,000 coverage amount. Generally speaking, whole life is significantly more expensive than term life insurance.
Life insurance is no longer needed for many people once they reach their 60s or 70s. At this point they retire, their kids have grown up, and they've paid off their mortgage and other debts. However, others prefer to keep life insurance later in life to leave an inheritance and to pay off final expenses.
The IRS uses the “seven-pay” test to determine whether to convert a life insurance policy into a MEC. If you put too much money into your policy in the first seven years, it becomes a modified endowment contract.
The life insurance contestability period typically lasts two years from the date of policy approval. During this time, an insurer has the right to investigate any aspect of a policyholder's health that could have been misrepresented on their application.
| Age | Term length | Average monthly rate |
|---|---|---|
| 40 | Term length10 years | Average monthly rate$47.41 |
| 40 | Term length15 years | Average monthly rate$61.33 |
| 40 | Term length30 years | Average monthly rate$137.89 |
| 50 | Term length10 years | Average monthly rate$112.67 |
Annuities take payments upfront and turn them into future income, including the option of guaranteed income for life. Both annuities and life insurance have several options to grow your savings. Life insurance is better for leaving an inheritance, while annuities have more investment and income guarantees.
The downsides of permanent
In addition, the premiums are much higher than with a term policy so you might not want to look to whole life to cover all your life insurance needs. If you fail to pay the premiums or if the investments in the cash account plummet in value, the policy can lapse, leaving you without coverage.
For every $100 you invest in whole life insurance, the first $5 goes to purchasing the insurance itself; the other $95 goes to the cash value buildup from your investment, Ramsey says. But for about the first three years, your money goes to fees alone. Someone is making out, and it's not your beneficiary.
If a payment isn't received by the end of the grace period, the policy lapses. Your beneficiaries will likely not be able to claim your death benefit, and you'll lose the premiums you've already paid.
How much does it cost to cancel life insurance?
In most cases, there are no fees or penalties for canceling a term life policy. Also, any premiums you have paid will be fully refunded if you cancel anytime during the free look grace period, which lasts anywhere from 10 to 30 days when the policy is first issued.
Unclaimed life insurance policy proceeds are turned over to the state in which the insured is last known to have resided (often with interest) after a certain number of years have passed, following state laws on unclaimed property.
How long does it take to borrow against life insurance? It often takes five to 10 years to accumulate enough cash value to borrow against your life insurance policy. The exact length of time depends on the structure of your policy, including your premiums and rate of return.
The Bottom Line
Paid-up life insurance means your whole life insurance policy is paid in full, remains in force, and you don't have to pay any more premiums.
The length of time varies by insurer, but in most cases, cash value does not start to accrue until you have paid premiums for two to five years.
