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Should You Convert Term Life Insurance to Permanent?
Should you convert term life insurance to permanent? We’ll go over what term and permanent life insurance are and the benefits of converting to help you make a decision. But the short answer is, in many cases, yes.
What Is the Difference Between Term and Permanent Life Insurance?
What Is Term Life Insurance?
Term life insurance provides coverage for a set number of years, typically for a policy length of 10, 15, or 20 years, although other contract lengths do exist. There are several types of term policies, such as level term, yearly renewable term, and decreasing term. The type of coverage you choose will depend on your financial needs.
- Level term is the most common, with a set premium and a face value that does not change.
- Yearly renewable is just that – a contract length of one year that you can continue to renew without going through the entire application process again each year. However, your premiums will become more expensive each year as you age and renew.
- Decreasing term is most associated with a mortgage, as the death benefit value declines each year as you pay a fixed premium. This can be used to ensure your loved ones are not left with a mortgage or similar expense to pay off in the event of your death.
If you want to know if you can renew or extend your term life insurance policy, you can read more here.
The main benefit of term coverage is the generally more affordable premium; however, it comes at the cost of higher risk. If you outlive your term length, you have a few options. You can:
- convert to a permanent policy
- renew your term coverage
- apply for a new policy at an older age and with any health conditions you may have developed since the start of your original coverage
These factors will all result in more expensive premiums. If you opt out of renewing or converting, you risk being left without life insurance, which may financially impact your loved ones in the event of your death. The premiums you paid are not refunded if you outlive your policy. In addition to higher risk, term life insurance does not come with the advantage of having a savings component the way many permanent policies do, limiting its impact on your financial planning. If you die within the term of your policy, your beneficiaries will receive the face value, or coverage amount, of your contract. If you are interested in reading more about what happens to term life insurance if you don’t die, you can read our article on it here.
What Is Permanent Life Insurance?
Permanent insurance is just that – coverage that lasts for a lifetime. In addition to the face value of the death benefit, permanent plans accumulate value over time due to their built-in cash value component that is tax deferred. While the premiums are higher, a portion of what you pay is put towards the savings component, which has a higher growth rate than a typical bank savings account.
There are several types of permanent policies, including whole, universal, and variable. Each type has similar components but is designed to meet different needs and comes with varying levels of risk.
- Whole life has fixed premiums, cash value growth, and a set death benefit.
- Universal life policies may have adjustable premium payments and death benefits within the parameters of your individual policy. Under the umbrella of universal coverage, there are options for fixed rate, guaranteed, indexed and variable.
The cash value component of a permanent policy adds flexibility to your coverage, as it can add to the value of your death benefit or be accessed during your life to supplement your retirement or other financial needs. Permanent insurance is an asset that can be used to create an immediate estate.
What Policy Type Meets Your Needs?
When assessing your needs, it is important to consider several factors. Namely, premium cost, long-term financial needs, and your own financial plan. Meeting with a financial advisor or life insurance agent can help you determine what coverage type meets your needs. Term protection may be best suited to your needs if you are looking for more affordable premiums and life insurance as debt protection. Term coverage can also be used to temporarily supplement your permanent death benefit if you have a large expense, like a mortgage, that you do not want to leave your loved ones with. As your dependents age, you may have less need for a death benefit. Once your children have moved out or completed college, your financial needs may change. It is important to regularly review existing life insurance policies to ensure your coverage is still sufficient and to ensure you are not paying for more than you need. If you want to know more about how much life insurance you really need, you can read our article on the subject here.
If your coverage needs change, you may be interested in converting from term to permanent coverage. Your income may rise, allowing you to afford the higher premiums of permanent coverage, or you may have children and want to ensure they will be financially provided for no matter what. There are various reasons to convert your policy. If you want to learn about how often you should review your life insurance policy, you can read more here.
How Do I Know If I Can Convert My Term Policy to a Permanent Policy?
When shopping for life insurance, it is important to consider if your goal is to eventually convert from a term to a permanent policy, as not every contract can be converted. Many providers have restrictions on what kind of permanent policy you can convert to, so communicating with your insurance agent when shopping will help ensure there are options open to you when it comes to converting. If you want to convert to coverage with a higher death benefit than your current term contract, you may need to undergo the underwriting process again. There are some carriers that allow you to avoid going through the process again by choosing a policy with a rising death benefit if available. The value of your death benefit would rise over time, although your premium will be higher than a level death benefit.
If your provider does not allow you to convert your existing policy, you may need to apply for new coverage. If this is the case, you can get a free quote from us today to compare rates. The best fit for a new policy may be with a new provider. You should not cancel your contract until your new policy is in place to ensure there are no gaps in your protection.
When shopping for coverage and planning to convert your plan, it is important to take note of any required timeframes noted in your contract. Some policies and carriers only allow conversion within a certain number of years or prior to the policyholder turning a certain age.
The Conversion Process Explained
Review your existing policy: make sure you are within the timeframe set by your provider to convert and review your death benefit value to ensure it meets your financial needs. It may be beneficial to meet with your financial advisor or life insurance agent to assess your needs and options.
Contact your insurance provider: alert your provider that you’d like to convert your term coverage and they will provide you with the conversion application form and request any additional information acquired.
Fill out the application form: as this is a conversion and not a new policy, it will not be as time intensive as the initial application you completed. Many carriers allow you to convert your coverage without a new medical examination. You may also choose to upgrade your death benefit amount during this process. It is important to consult with your financial advisor to ensure your needs are met.
Underwriting and approval: your provider will review your policy and application before approving your new coverage. Once approved, you will receive the details of your new coverage, including the new premium cost, the amount of your death benefit, and information on your cash value component.
The Benefits of Converting Your Policy
There are several advantages to converting your term policy to permanent coverage:
Save time and money: you typically do not need to undergo a new medical exam, speeding up the application process, and saving you money if you have developed any health conditions since your initial underwriting process.
Added value: even if you do not alter your death benefit amount, permanent policies accumulate a cash savings component that grows at a faster rate than money in your bank savings account. This fund can be accessed during your life to supplement retirement, education costs, and emergency expenses. It can also add to the value of the death benefit your beneficiaries receive.
No lapses in coverage: if you outlive your term contract, you will be left without insurance or going through a new application and underwriting process with significantly higher premiums at an older age with any new medical conditions. Your beneficiaries will be protected no matter what with permanent life insurance.
Flexibility: term policies are generally a set premium for a set number of years and set death benefit amount. Permanent coverage is significantly more customizable, with the ability to adjust your benefit amount and choose different premium options. Many permanent contracts allow you to pay a higher premium for several years so you can pay little to none after a set number of years.
The Bottom Line
It is essential to regularly review your financial needs and your life insurance coverage to ensure that your loved ones are protected no matter what. Converting your policy from term to permanent coverage may help you meet your financial and estate planning goals. Since everyone’s situation is different, it may help to give us a call and walk through what option is best for you. Call us at (800)521-7873 and tell us a bit about your current financial situation and your coverage needs, and we can explain your options.
