People who buy term life insurance usually do it because it is extremely affordable and it fits well within their budget during their working years. At some point down the road, however, a permanent policy that can build cash value may seem more attractive. Perhaps the insured can afford to pay a bit more or they just don't need as much coverage. In other words, situations change.
Most term life insurance policies include a stipulation that one can "convert" the policy to a permanent policy, either a universal life or a whole life, within a specific time frame. Instead of purchasing a new policy, one can convert all or some of their current policy, which is much easier. That is because with a conversion there are no health questions or exams. Yes, the new policy will be based on the age of the insured at the time of the conversion, but that would be the same if one were to purchase a new policy.
Without having to worry about health questions, one can convert their policy regardless of changes in health. For example, say you purchased a 20-year term policy 10 years ago, but since then your health has declined significantly. A heart attack, cancer or diabetes would probably keep you from getting a new policy or have one issued at a higher premium . However, you could convert some or all (depending on the insurance carrier) of the face amount without being concerned if your current health situation will affect the rates.
In other words, if you were healthy when you bought the term policy, the new permanent policy will be priced as if you were still healthy, even if you are not.
Why do people want to convert a term life policy? The first reason is to lock in on a premium that will not increase. At the end of the policy's term period, the rate will jump up dramatically and will do so each year. This becomes an "annual renewable term" (ART) which in essence is a series of 1-year term policies. No one really wants that.
On the other hand, permanent policy will stay the same price as long as you continue to pay the premiums. No more having to worry about outliving your life insurance.
Another reason people will convert a term policy is to start building some cash value. That money grows inside the policy tax-free and can be used down the road for all kinds of purposes*. The earlier one converts the policy the faster the cash value grows.
The important point is too find out when you purchase a policy as to what your options are. Some carriers will only let you convert in the first 10 years while others will allow for a conversion anytime before the term ends.
Also, find out what kind of policies you can convert your term policy to. You may not want a traditional universal life policy and that may be your only option, while other companies only have whole life. These are good questions to ask your agent, or drop us a note and we'll help you out.
Know what your options are when purchasing life insurance!
*Depending on the amount of cash that has accumulated in a policy, the funds can be either surrendered (cashed out) or borrowed. Surrendering the cash value could have tax implications, but getting the money in the form of a loan is a great way to use the funds for a retirement supplement. Any outstanding loan amounts will be deducted from the face value of the policy at the time of death.
Chris Castanes is the president of Surf Financial Brokers, helping people find affordable life, disability, long term care, cancer, accident and other insurance coverages in North Carolina, South Carolina, Virginia, Tennessee and Georgia. He's also is a professional speaker helping sales people be more productive and efficient and has spoken to professional and civic organizations throughout the Southeast. And please subscribe to this blog!
