How to Convert Term Life Insurance to Permanent Life Insurance: A Smart Move for Some Policyholders

 

Life insurance is a vital part of financial planning, but it can be confusing to choose the right type of policy for your needs. Term life insurance and permanent life insurance are two of the most common options, but they have different features, benefits, and drawbacks. In this article, we will explain what term life insurance and permanent life insurance are, how to convert from one to another, and why this can be a smart move for some policyholders.

What is Term Life Insurance and Permanent Life Insurance?

Term life insurance is a type of life insurance that provides coverage for a specific period of time, usually between 10 and 30 years. If you die within the term, your beneficiaries will receive a lump sum death benefit. If you outlive the term, your coverage will expire and you will not receive any payout. Term life insurance is typically the cheapest and simplest form of life insurance, as it only pays out if you die during the term.

Permanent life insurance is a type of life insurance that provides coverage for your entire life, as long as you pay the premiums. Unlike term life insurance, permanent life insurance also has a cash value component, which is a savings account that grows tax-deferred over time. You can access the cash value through withdrawals or loans, or use it to pay your premiums or increase your death benefit. Permanent life insurance is more expensive and complex than term life insurance, as it offers lifelong protection and additional benefits.

How to Convert Term Life Insurance to Permanent Life Insurance?

If you have a term life insurance policy, you may have the option to convert it to a permanent life insurance policy without having to go through underwriting or medical exams. This option is called a convertible term life insurance policy, and it allows you to switch from one type of coverage to another without losing your insurability or paying higher rates based on your age or health.

To convert your term life insurance policy to a permanent life insurance policy, you need to follow these steps:

• Check your policy details to see if you have a conversion option, what types of permanent life insurance you can convert to, and what are the deadlines and fees for doing so.
• Contact your agent or company and inform them that you want to convert your policy. They will provide you with a conversion questionnaire that asks about your personal information, current coverage, and desired coverage.
• Choose the type of permanent life insurance that suits your needs and goals. There are different types of permanent life insurance, such as whole life, universal life, variable life, and indexed universal life. Each one has its own features, benefits, and drawbacks, so make sure you understand them before making a decision.
• Fill out the conversion questionnaire and submit it along with any required documents or payments. Your agent or company will review your application and issue you a new policy with the same death benefit as your original term policy.
• Start paying the premiums for your new permanent life insurance policy. The premiums will be higher than your term policy premiums, as they reflect the increased cost of lifelong coverage and cash value accumulation.

Benefits of Converting Term Life Insurance to Permanent Life Insurance

Converting your term life insurance policy to a permanent life insurance policy can have several advantages, depending on your situation and goals. Some of the benefits of converting your policy are:

• You can extend your coverage for life. If you still need life insurance after your term expires, converting your policy can ensure that you have protection for as long as you live. This can give you peace of mind that your loved ones will be taken care of no matter when you die.
• You can build cash value. By converting your policy, you can start accumulating cash value in your policy that grows tax-deferred over time. You can use this cash value for various purposes, such as supplementing your retirement income, paying for education or medical expenses, or enhancing your legacy.
• You can access living benefits. Some permanent life insurance policies offer living benefits that allow you to access a portion of your death benefit while you are still alive if you suffer from a terminal illness or chronic condition. This can help you cover the costs of care or improve your quality of life.
• You can avoid underwriting or medical exams. One of the biggest advantages of converting your policy is that you do not have to go through underwriting or medical exams again. This means that you can keep your original health class and premium rate regardless of any changes in your health or lifestyle. This can save you money and hassle if you have developed any health issues or risky habits since buying your term policy.

Drawbacks of Converting Term Life Insurance to Permanent Life Insurance

Converting your term life insurance policy to a permanent life insurance policy can also have some disadvantages, depending on your situation and goals. Some of the drawbacks of converting your policy are:

• You will pay higher premiums. The main downside of converting your policy is that you will have to pay higher premiums for your new permanent life insurance policy. This is because permanent life insurance is more expensive than term life insurance, as it covers you for life and has a cash value component. You may find it difficult to afford the higher premiums, especially if your income or expenses have changed since buying your term policy.
• You will lose flexibility. Another downside of converting your policy is that you will lose some flexibility in your coverage. Once you convert your policy, you cannot go back to term life insurance or change your death benefit amount. You will also have to pay surrender charges if you cancel your policy or withdraw more than the allowed amount from your cash value. You may find it limiting to be locked into a permanent life insurance policy that does not suit your changing needs or goals.
• You will reduce your death benefit if you withdraw or borrow from your cash value. A final downside of converting your policy is that you will reduce your death benefit if you withdraw or borrow from your cash value. This is because any withdrawals or loans from your cash value will reduce the amount of money that your beneficiaries will receive when you die. You may also have to pay interest on any loans that you do not repay. You may end up leaving less money for your loved ones than you intended.

Best Practices for Converting Term Life Insurance to Permanent Life Insurance

If you decide to convert your term life insurance policy to a permanent life insurance policy, here are some tips and recommendations for making the most of your conversion option:

• Review your policy details. Before converting your policy, make sure you review your policy details and understand the terms and conditions of your conversion option. Check if you have a conversion option, what types of permanent life insurance you can convert to, what are the deadlines and fees for doing so, and what are the implications for your coverage and premiums.
• Compare different types of permanent life insurance. Before converting your policy, make sure you compare different types of permanent life insurance and choose the one that suits your needs and goals. There are different types of permanent life insurance, such as whole life, universal life, variable life, and indexed universal life. Each one has its own features, benefits, and drawbacks, so make sure you understand them before making a decision.
• Convert sooner rather than later. Before converting your policy, make sure you do it sooner rather than later. The sooner you convert your policy, the lower your premiums will be, as they are based on your age at the time of conversion. If you wait too long, you may miss the deadline for converting your policy or pay higher premiums based on your older age.
• Work with a trusted advisor. Before converting your policy, make sure you work with a trusted advisor who can help you navigate the process and advise you on the best option for your situation and goals. A qualified financial planner or insurance agent can help you review your policy details, compare different types of permanent life insurance, and guide you through the steps to convert your policy.

Conclusion

Term life insurance and permanent life insurance are two of the most common types of life insurance, but they have different features, benefits, and drawbacks. If you have a term life insurance policy, you may have the option to convert it to a permanent life insurance policy without having to go through underwriting or medical exams. This can be a smart move for some policyholders who want to extend their coverage for life, build cash value, access living benefits, and avoid underwriting or medical exams.

However, converting your term life insurance policy to a permanent life insurance policy can also have some disadvantages, such as paying higher premiums, losing flexibility, and reducing your death benefit if you withdraw or borrow from your cash value. Therefore, before converting your policy, you should evaluate your personal situation and goals and weigh the pros and cons of each type of coverage.

If you need more information or assistance on how to convert term life insurance to permanent life insurance, please contact us or visit our website today. We are here to help you find the best solution for your life insurance needs.