Suppose you select the appropriate term life insurance coverage. In that case, it will remain available throughout your family’s most critical financial times, for instance, until the mortgage has been completed or your children are in college.
However, the goals could alter. You may find the duration of the life insurance policy you have purchased isn’t sufficient to satisfy your requirements. You may even decide that you need protection that lasts the rest of your life. Do you need to start from the beginning and purchase new insurance? Not necessarily.
Life insurance plans for term generally provide the option of converting to permanent insurance. The process is straightforward; however, deciding if it’s a good idea isn’t an easy task. This article will help you learn the best way and why you should convert your term life into permanently-based life insurance.
Why Convert Term Life to Permanent Life Insurance?
There are many reasons for someone to convert their term life insurance policy to permanent insurance. A primary motive is to protect your loved ones for the rest of their lives. A different reason could be to build cash value that can be used for retirement or other financial objectives. Some people might just prefer the security of knowing they have life insurance.
How to Convert Term Life to Permanent Life
Converting a term-life policy to a permanent one is much easier than applying for an entirely new policy. The first step is to check the policy’s language to determine the possibility of conversion (it is typically found on policies).
After that, look up the conversion period and the timeframe you can convert. Certain companies allow policyholders to change anytime within the duration of the policy. Some will even limit the conversion period, says Henry Hoang, founder of Bright Wealth Advisors and Bright Life Insurance in California. For instance, the conversion period on an insurance policy with a term of 20 years could be limited to the initial ten years that the policy is in force.
“If you know when that deadline is, you want to be sure you can make the conversion before the period expires,” He states.
Then, contact your insurance company or agent for a request to convert your policy. It won’t be necessary to take an examination for medical insurance or undergo the underwriting process, according to Dane Spealman, a State Farm insurance agent in Pikeville, Maryland. The underwriting class you took when you bought your term plan (standard preferred, favored, or super preferential) will remain the same even if your health changes.
Simply fill in the questionnaire, and your new policy will be issued in a few days, according to the doctor.
Things to Consider When Converting Term Life to Permanent Life Insurance
There are several factors to consider when switching from term life insurance to permanent insurance. One of them is the cost. Permanent life insurance is generally more expensive than term insurance, and you must be sure you can afford the higher cost. Another factor to consider is what type of insurance policy you’d like. There are a variety of permanent insurance, each having distinct advantages and disadvantages. It is essential to select one that is suitable for your financial needs and situation.
The Cost of Converting
There aren’t any charges for converting a term policy to a permanent one, Spealman says. But, the amount you pay for insurance, i.e., your premium, will increase. The amount it will increase is contingent on a variety of factors.
While your health will not be an issue since you’re locked in the original underwriting class, the age at which you switch will affect the rate you pay. The older you get, the more expensive the premium you’ll pay.
What you exchange can affect your premium. There is the option to convert the entire amount of a term insurance policy or only a fraction. For instance, if you have a term policy with a death benefit of $500,000, it is possible to convert $250,000 to a permanent insurance policy. You’ll be paying less for a permanent policy with a lesser benefit. Likewise, the cost of any remaining term insurance will decrease due to diminished benefits.
The time you convert could alter your rate. For instance, Spealman says that State Farm provides term life policyholders a credit on the amount they’ve spent towards their policy. This credit can be applied to the price of a permanent insurance policy in the first couple of years after buying the policy. It’s worth contacting your insurance company to determine whether this is an option, as it may affect your cost.
The type of permanent insurance policy you select to change your current term insurance will affect the cost of your insurance. (Note that you may get only one type of policy to make the conversion, like the universal insurance plan.) For instance, the cost of a life insurance policy is greater than the cost of universal life insurance policies, Hoang says. Knowing what a whole life insurance policy is is crucial to know the type that suits your needs the best.
Reasons to Convert a Term Life Policy
If your insurance company or company sends you a letter advising you to take advantage of an opportunity to change your policy, it doesn’t mean you have to. There was a reason that you bought the term life insurance instead of a permanent one. There could be a reason why buying a permanent insurance policy is the better choice.
You’ve experienced an alteration in your health. Converting a term life insurance policy into a permanent one allows you to increase your insurance coverage without going through the underwriting process. This can be a beneficial option if your health declines negatively. Hoang says that if you were to purchase a new life insurance policy to increase your coverage, you’d have to pay huge costs or be uninsurable. If you decide to switch to a new policy, your current health will not affect the cost of an ongoing policy, nor will it affect your insurance coverage.
The budget you’ve set has gone up. You might have considered purchasing a longer-term policy initially but could not afford the higher cost. If you’re making more today, it might be beneficial to convert if the more expensive cost of a permanent policy can be afforded in your financial budget, suggests Dennis LaVoy, a Certified Financial Planner, Chartered Life Underwriter, and the founder of Telos Financial in Michigan.
You are looking to purchase a cash-value asset. One of the advantages of a life insurance plan is that part of the premium is used to pay for insurance, and the other portion goes towards the creation of cash value. Many people seek cash-value life insurance to take advantage of tax-free cash at retirement (or in other circumstances). It’s not a replacement to save for retirement in an account like a 401(k); however, it could be a part of the financial plan.
You’d like to leave an inheritance. If you want to be capable of leaving an inheritance to your children but don’t want to cut back on spending in retirement to make sure you have enough money left to leave behind and on, a term-life conversion is a solution to that issue.
“At retirement, someone might want a permanent policy to get peace of mind to spend more liberally and still leave money for the kids,” Hoang adds. Permanent policies are in effect regardless of when you pass away and pay the death benefit to the beneficiaries.
You’ll want enough money to cover your last costs. Even if you’re not worried about transferring funds to your children, you may not want to burden them with paying for funeral expenses. Thus, changing a term-only policy to a long-term policy to pay for final expenses may be a good idea.