When It’s No Longer Enough.
When you bought a 20-year term life insurance policy, it may have been enough to meet your family’s needs. Now that you are getting toward the end of the 20-year term, it seems clear that a permanent life insurance policy would suit you better. At this point, you may be wondering what your options are. Do you let your term policy expire and buy a new policy? Do you have any other choices?
You Have Options
A term life insurance policy is just what it sounds like: life insurance for a set period of time. It eventually expires. However, instead of letting your term policy expire, you may have the ability to extend your current policy or even convert it to a permanent life insurance policy (also known as a “term conversion”).
Sometimes the option to convert is included automatically in your policy, and sometimes you will need to purchase it as a rider or “add on” to the term policy.
If there is any possibility you may want to continue your life insurance coverage past the end date of your term policy, you definitely don’t want to just let your term policy completely expire then apply for a brand new policy. This could lead to much higher premiums, lower coverage or even uninsurability.
Reasons Why You Would Convert
Some common reasons you might want to convert are:
- you want life insurance coverage for the rest of your life
- you’re still supporting adult children
- you’re caring for lifelong dependents, such as a child with special needs
- you are caring for your aging parents
- you have a long way to go before your mortgage is paid off
- you are concerned about estate taxes
- your health is declining, yet you want to continue your life insurance coverage
- you were unable to afford a permanent policy initially, but now you can
- you want to make sure you have enough insurance to cover your funeral costs
- you want to further diversify your retirement income
- you have been helping your child pay their student loans and want to make sure the loans are paid off in case you die
- you might take up a dangerous hobby or career that may affect your ability to get affordable coverage in the future
- you are interested in the cash value component in addition to the life insurance benefit
- you want to provide retirement income for your spouse
Benefits of Conversion
Your Policy Can’t be Cancelled
Once you’ve been issued a permanent life insurance policy, as long as you pay your premiums, your policy will provide you with life-long insurance protection that can’t be cancelled – regardless of your age or health. And because it won’t expire after a certain time, you don’t have to worry about having to buy a new policy once the old one ends. This is important because if you did have to buy a new policy, your monthly premium may be much higher because of your current age or health.
You Will Lock In Your Insurability
You most likely don’t have to submit to another health exam, locking in your insurability. If you let your term policy expire, you will need to undergo another physical exam and the underwriter may deny the application due to the results of the exam. Instead, when you choose to convert an existing term policy, the underwriter will likely give you the same risk class you had at the time that you took out the term policy even if your health has deteriorated or you are now uninsurable. It makes sense to convert to permanent life insurance if you have health issues now that you did not have at the time of your application.
You Will Not Outlive Your Life Insurance
Some people outlive their term policies. A term policy will give you peace of mind that you can leave something for your survivors if something does happen to you, but you have no benefit beyond that once the term policy expires. When you convert to a permanent life insurance policy, you can go into your later years knowing that your survivors will receive funds after you are gone. No matter how long you live, you will still have life insurance coverage.
You Can Lock In Your Premium Rates for Life
Just like term life insurance, you will not experience a rate increase over time with permanent life insurance because rates remain the same for the remainder of your life. The price you initially pay will remain the same – no matter how long you have the policy or how your health changes. The price you pay today is what you’ll continue to pay for as long as you maintain your policy.
Your Policy Will Build Cash Value
Much like buying a house, permanent life insurance builds in value over time (similar to equity in a home). This is called cash value. You build cash value when the money that you put into your policy grows (at a guaranteed interest rate) and continues to grow over the years. That cash value is yours to borrow for anything you like: a down payment on a home, a child’s education, or even to supplement your income in retirement. And, if at some point you decide to cancel the policy, any cash value growth is yours to keep.
You Can Borrow From Your Policy*
The cash value that accumulates in your policy can be accessed by withdrawing cash or taking money out as a loan. This is called a life insurance loan. Don’t just start borrowing from your policy. This should be done carefully and thoughtfully. Some pros of borrowing from your policy are: no credit check, no complicated loan application, the loan does not show up on your credit report, and you have the option to not repay the loan and have the amount deducted from your death benefit. There are some negatives though. For example, borrowing from your policy and not paying the loan back may reduce the amount of money your family will receive when you die. Always consult a financial advisor before you borrow from your permanent life insurance policy.
Sometimes You Can Skip a Payment
If you need to skip a payment, you may be able to use the cash value in your policy to cover your premium for that month – provided you have enough available cash value. The flexibility of a permanent life insurance policy gives you the security of knowing your policy won’t lapse if you find yourself in a tight spot as long as you have enough cash value. Always call the insurance company and learn how much cash value you have before you choose to skip a payment. You don’t want your policy cancelled because you stopped making your payments.
Partial Conversion Might be Available
Many times, you will have the option to convert a portion of your term life insurance policy and not have to convert the entire amount. This way you can still have the benefits of permanent life insurance and keep the premiums lower since you are only converting some of your term policy.
Additional Facts to Consider
Premiums Might be Higher
Permanent life insurance usually costs more than term life insurance, so check with your insurance agent to see if this will apply in your case. While converting to a permanent life insurance policy might cost more, it will almost always cost less than starting with a new policy all over again, meaning you let your current term policy end then you reapply for a completely new permanent policy, going through a full medical exam.
There May be Deadlines
Sometimes the insurance company sets a deadline for you to meet to have the conversion option. These deadlines can vary depending on the company and policy type. For example, you might have to keep your term policy for a set period of time before you can convert, or you might be able to convert at any time. In addition, the cost to convert may be different depending on when you decide. For example, the cost may be lower if you convert early into your term policy.
Converting is Not Always the Best Choice
Sometimes converting your term policy to a permanent policy is not always the best choice. For example, say you were unhealthy when you initially bought your term policy. Because of your health, you ended up paying high premiums. If you decided to convert that term policy to a permanent policy, you will convert at that same risk class. But in your case, you have actually improved your health considerably. Maybe you have lost a great deal of weight and have your diabetes under control. Even if you are older, because of your much improved health, you might consider purchasing a new permanent policy instead of converting your current term policy.
You May Need to Pay a Lump Sum
Some companies require you to pay a lump sum to do the conversion. This is often required if you want to stay in your same risk class based on your age, meaning your current age is not taken into consideration to convert the policy. Some companies do not require a lump sum payment if you decide to have your risk class re-evaluated, allowing them to reclassify you based on your current (attained) age.
You Might Not Be Able to Convert the Entire Amount
Some companies require that you keep some of your term policy as a term policy. In that case, you can’t convert 100% of your term policy into a permanent policy. Each company is different, so check with yours to see what the percentage of your current policy you can convert.
There May be an Age Limit
Some companies will not let you convert after you are a certain age. Even if you have more time on your term policy, if you are over a certain age, often in your 70s or 80s, you will not be able to convert your policy.
Questions to Ask Your Insurance Agent
When you buy your initial term life insurance policy, or if you already have a policy and you want to convert, ask these questions:
- Is my term policy eligible to convert?
- Does my policy automatically come with this option, or do I need to buy a term conversion rider?
- How much will my premium increase?
- Should I have the company base my rate off my original or my current age?
- How does the cash value option work?
- Can I convert the entire amount of my current policy?
- Do I have to wait to convert, or can I do it any time?
- My health is better now compared to when I initially bought the term policy. Should I convert or apply for a new permanent policy?
- Will I need to pay a lump sum?
- Do I have to be under a certain age to convert?
- What type of permanent life insurance can I convert to (there is more than one type)?
- When should I convert (sometimes it’s cheaper to convert earlier).
Whatever you do, don’t stop making payments or just let your term policy end without taking action. You may have more options than you know – options that are better than starting over with a brand new policy or going without life insurance.
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This information is provided for general consumer educational purposes and is not intended to provide legal, tax or investment advice.
*Accessing cash values may result in surrender fees and charges, may require additional premium payments to maintain coverage, and will reduce the death benefit and policy values.
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