Converting term life to permanent life insurance
Term life insurance policies are for a certain period, usually 10 to 30 years. They are less expensive than permanent life insurance because you will likely outlive a term life policy. Permanent life insurance, on the other hand, covers you until you die, regardless of how many years that is.
The good news is that most term life insurance policies are convertible, allowing you to change them to permanent life insurance, usually whole life insurance. Convertible policies usually include a limit as to when you can convert, generally before the term ends. There may also be an age limit at which it's no longer possible to convert your policy, so doing it early is a good idea.
Another reason why you shouldn't wait to convert your term life policy -- premiums are based on age. The longer you wait, the more you'll pay for permanent life insurance premiums when you convert.
Reasons for converting term to whole life insurance
Converting term life to whole life insurance isn't for everyone, especially for people who can't afford the higher permanent life premiums. Here are six reasons why you should think about converting to permanent life:
1. You want to earn cash value with permanent life
Permanent life policies allow you to withdraw money while you're alive. This gives the flexibility of knowing you have an emergency savings source.
Tapping into your life insurance is not always wise unless you've exhausted all other funding sources. Your survivors won't get that life insurance money when you die if you tap into cash value.
You should also remember that you won't start building cash value until you convert, so it won't grow as quickly as if you had purchased whole life right from the start.
2. You still need coverage at the end of your term life policy
Term life is often a more affordable option alternative because it limits the number of years during which the insurance company might have to pay. However, an insurer will have to pay for a permanent life insurance policy eventually.
You can think of term life like any other insurance. You pay into it like health insurance and auto insurance, but you don't actually get anything back unless you file a claim or need services.
If you only need coverage for a specific period of time, term life is a great choice. But if you're reaching the end of the term and realize you need the coverage to last much longer, converting to permanent life is a good option.
3. You're financially better off than when you bought your term life policy
Permanent life insurance is more expensive, and some people, especially those just starting out, can't afford it. This is especially true if you have a health problem.
However, as you age, you'll likely make more money and improve your financial situation. That's a good time to convert to a permanent life policy. Permanent life will cost you more than term life, but it will also ensure you have lifelong coverage.
4. You have health issues
You may not need to have a medical exam if you convert from a term life to a whole life policy. If you let your term life lapse and then apply for another plan, you'll likely need a medical exam. When you convert to a permanent life policy, you probably won't need a medical exam.
When you convert, the insurance company will likely give you the same health rating as the term life policy -- even if you had that medical exam years ago.
Verify with your life insurance company to find out the medical exam requirements.
5. You have dependents who may need financial help after you die
If you have a dependent who will need financial help for many years after you pass away, and you didn't have the dependent when you took out your term life, consider converting.
Converting to permanent life can leave money behind for that person's care.
6. Premiums remain the same for the rest of your life
Permanent life insurance locks in rates, so you won't have to worry about rate increases or needing to change to another term life policy.
You'll likely pay more for premiums on a permanent life policy than on a term life policy. Consider all of your options before you decide to pay the higher rate.
Questions to ask about convertible term life insurance
If you have a term life policy or you're interested in getting one to convert to permanent life eventually, here are some questions to ask:
- Is the policy convertible? Most term life policies are convertible, but you'll want to confirm.
- What's the deadline to convert? Convertible life insurance policies only let you convert during a specific period. This could mean from when you get the term life policy and your age.
- What are your conversation options? Policies vary by company, so you'll want to find out your options if you plan to convert eventually. Your term life is a commodity, so don't just go with the cheapest policy. Find the highest quality.
If you believe you'll need whole life insurance eventually, however, you might be better off buying it up front and locking in a lower rate for life.
