Term life insurance, which covers a predetermined number of years (often 10, 15, or 20), is a cost-effective option for providing for your loved ones. However, if you anticipate a need for life insurance beyond that time period, you may want to consider switching from a term policy to a permanent one. Permanent insurance policies can be maintained for the rest of your life and beyond. As a result, the cost is typically higher than for term insurance. However, the added expense may be justified if doing so facilitates your goals.
The majority of term life insurance policies can be converted to permanent coverage with the same insurance provider. (The policy’s term will specify whether or not it’s convertible, as well as any deadlines for doing so. If this information isn’t included in your insurance, contact your insurer or a financial advisor.
Should you switch from term to permanent insurance?
Converting is an option, but it depends on your needs and financial goals. If you wish, and can afford the higher rates, you might choose to:
Guaranteed lifelong protection. As long as you pay your premiums, your beneficiaries will get a death benefit from your permanent life insurance policy. In contrast, with term insurance, both the policy and the death benefit are voided if you outlive the policy’s term.
A fixed amount. As you get older or your health changes, life insurance typically becomes more expensive. Therefore, the price can skyrocket once you reach a certain age or develop particular health conditions. You can “lock in” your coverage (and price) by switching to a permanent policy.
The opportunity to accumulate cash value. The “cash value” of a permanent policy can grow over time through investments like mutual funds, stocks, or bonds, and the policyholder can withdraw the money at a later time. You can accomplish this by taking a loan against the policy or making a withdrawal, both of which limit the amount your beneficiaries would get and may result in tax consequences. However, if you leave the cash value alone, it can be used to offset premiums or boost the payout to your beneficiaries. You should read more about permanent insurance.
The question is, “Term or Permanent?”
To determine whether you should purchase term or permanent insurance, ask yourself the following 8 questions.
Convertible term life insurance has many advantages.
While there is variation in the specifics of policies, typically speaking:
When is the right time is up to you to determine. You can usually decide when to convert a term policy into a permanent one if it comes with a conversion option. You should check the fine print, though, as there may be limitations.
No additional medical testing is required for the switch. You probably won’t even be asked any health-related questions or have to undergo a thorough physical examination. You’re better off if you convert if you start experiencing health problems. Your new policy’s premiums (payments) will be calculated using both your current age and your health status at the time you first purchased the term insurance. Doing so can reduce costs.
A premium credit may be available. When you switch to a permanent insurance, you may be eligible for a discount on the premium for the first year. The transition from temporary to permanent employment may be less costly with this option. However, plan ahead by inquiring about the second and subsequent year’s premiums if a conversion credit applies to your policy.
Is it necessary to convert everything?
Nope. Keep in mind that you can convert only a portion of your term insurance to permanent if you decide you want to keep some of it regardless of what you decide. If your term policy is for $500,000, you can choose to convert $250,000 and keep the remaining $250,000 in term insurance. If you want extra security until your children finish college but then want to shift your financial attention to something else, combining term and permanent insurance can make sense.
Eventually, doesn’t term life insurance run out?
Both, actually. The policy’s official duration and fixed premium will end, but you can maintain coverage indefinitely by paying a premium. To a specific age, say 90 or 95, “renewable” insurance can be extended for another year. Though you probably won’t have to get a physical in order to renew, you can expect to pay more due to the fact that your premium will be calculated using your current age.
