Term life insurance is frequently promoted as a cost-effective solution to offer a financial safety net for loved ones who rely on you. Because it only covers you for a set number of years rather than permanently, it is less expensive than permanent life insurance. Term life insurance is also cheaper because it lacks the cash value and internal policy levies that many permanent life insurance plans do.
If you choose the correct term length, your coverage will last for the years that are most important to your family financially—for example, until your mortgage got paid off or your children have graduated from college. Term insurance is an excellent option to protect yourself while saving for retirement. Term insurance is suitable for many scenarios and covers most people.
However, objectives might shift. Later on, you may discover that the term length of your life insurance policy is insufficient to fulfil your demands. You might even conclude that lifetime coverage is what you want. Is that to say you’ll have to start over and acquire a new policy? Certainly not. In most cases, term life insurance contracts can get converted to permanent life insurance policies. It’s simple to make the transition, but knowing whether it’s the correct move isn’t.
For example, on a 20-year term policy, the conversion period may be limited to the first ten years of coverage. If you know, the deadline is, you want to make sure you convert before the time limit runs out. Then contact your insurance agent or firm and request that your policy get altered.
You won’t have to undergo a life insurance medical exam or underwriting procedure. Even if your health has changed, the underwriting class you got allocated when you bought your term policy (regular, preferred, or super preferred) will not alter. Complete a questionnaire and new permanent policy ready for you within a few days.
The Price of Conversion
There are no expenses to convert a term policy to permanent coverage. However, the amount you pay for insurance (your premium) will rise. The amount it increases depends on several factors. Although your health will not be a factor because you get locked into your initial underwriting class, your age will impact your rate at the time of conversion. Your premium will increase as you get older.
Your premium gets impacted by the amount you convert. You can convert the entire amount of a term policy or just a portion of it. For instance, if you have a $500,000 death benefit policy, you could convert only $250,000 to permanent coverage. You’ll pay less for permanent insurance with a lower payout, and the premium on your remaining term life policy will be decreased as well.
Your conversion rate may be affected by when you convert. State Farm, for example, grants term life policyholders a credit for the amount they’ve paid toward their policy that applies to the cost of a permanent policy if they convert within the first few years of purchasing one. So, discuss with your insurer whether this is possible for you because it could save you money.
Finally, your premium will be affected by the type of permanent coverage you select to convert your term policy. (It’s also worth keeping in mind that you may get one policy type for conversion, such as universal life insurance.) A whole life insurance policy will have a more significant premium than a universal life insurance policy.
Converting a Term Life Policy for the Right Reasons
It doesn’t imply you should correct your policy because your insurance agent or company sends you a letter advising you to do so. After all, there’s a reason you chose a term life insurance policy rather than a permanent one. However, there may be a time when a permanent policy is more appropriate.
- You’ve experienced a shift in your health. You can extend your coverage by converting a term life insurance policy to a permanent policy without going through the underwriting procedure. If your health deteriorates, this may be a viable choice. If you wanted to extend your coverage with a new term life policy, you’d have to pay exorbitant rates or risk being uninsurable. However, if you convert, your present health will have no bearing on the premium or insurability of a permanent policy.
- Your financial situation has altered. You may have wanted to get permanent insurance from the start but could not afford the increased price. If you’re earning more money today, converting to permanent insurance may make sense if the higher premium on permanent coverage fits within your budget.
- You’re looking for an asset with a monetary value. One of the advantages of permanent life insurance is that a portion of your premium goes toward the expense of insurance, and a bit goes toward the accumulation of cash value. Some people prefer cash value life insurance to receive the money tax-free when they retire (or for other reasons). It shouldn’t be used as an alternative for saving for retirement in a 401(k), but it can include in a financial strategy.
- You’ll need money to cover your final expenses. Even if you don’t mind leaving money to your children, you may not want to burden them with the cost of your burial. Converting enough term coverage to a permanent policy can make sense to meet final expenses.