So you’ve gone through all the types of life insurance, and decided to settle on purchasing the term life option. Level term life insurance, an insurance that provides coverage for a certain period of time, is a very popular choice in the realm of life insurance – especially for younger folks due to its affordability factor (term life premiums are much less expensive than permanent life insurance premiums).
Term life insurance is designed to provide financial support to your loved one’s if you are no longer in the picture. The death benefit from a life insurance policy can be used to; secure your expected income until your children graduate from college, insure the balance of your mortgage, or protect your income until retirement age. You can also purchase convertible term life insurance, which we’ll discuss below.
Quick Article Guide
1. What is Convertible Term Life Insurance?
2. Types of Permanent Life Insurance
3. Is Convertible Term Life Insurance Necessary?
4. Renewable Term Life Insurance
5. How to Convert Your Policy
What is Convertible Term Life Insurance?
Now that you know what term life insurance is, convertible term life insurance essentially just means that you can convert your policy into permanent life insurance. What is permanent life insurance? It is a type of policy that provides lifelong protection at fixed periodic premiums. The nice perk about permanent life insurance is the fact that it builds cash value in addition to your death benefit. To add to that, another great advantage to converting is that you have the guaranteed ability to do so even if you were to contract a serious illness.
If you do decide to convert your policy, you won’t have to provide evidence of insurability. This is great if you’ve had any changes to your health, because that means the insurance company will use the health class you were assigned to when you originally bought your term life policy. One thing to keep in mind is that most life insurance companies have an age restrictions on when you can convert your policy by, typically 65 to 75 years of age.
When converting, you have the option to convert some or all of your policy face amount. Permanent coverage is more expensive, so your premiums will increase, but how much they increase will depend on how much of your policy you decide to convert.
Another thing to mention is that adding the conversion option onto your term life policy typically doesn’t cost anything, so there’s no risk in adding it!
An Example of Converting Your Policy
If you had term policy containing $500,000 in coverage and converted all of it, you’d have $500,000 in permanent coverage. You can also choose to convert part of it, meaning you could convert $250,000 into permanent coverage, and leave $250,000 as term life coverage. This may be beneficial if you don’t need as much coverage when you older, due to grown-up kids, paying off your mortgage, downsizing, etc.
Types of Permanent Life Insurance
There are a few different types of permanent life insurance that you can convert to, including:
- Whole life
- Variable life
- Universal life
- Variable universal life
- Survivorship life insurance
Out of that list, whole and universal life insurance are the two main types. Whole is a little more expensive than universal, but provides fixed rates and guaranteed cash value accumulation. Universal life insurance allows you to be flexible with your payments, as well as how much you choose to put towards your death benefit and how much you choose to put towards your savings account.
Do You Need Convertible Term Life Insurance?
You might be curious if convertible term life insurance is for you. Here are some good reasons why this is the right type of policy for you.
If you’re young and like the idea and perks of permanent coverage, but aren’t ready to take on the financial burden of it yet, then convertible term life is a fantastic option. By choosing the convertible option, you can pay cheaper premiums until you’re older, more financially stable, and ready to convert your policy.
Uncertainty About the Future
It’s also a great option for those – regardless of age – who have some uncertainty about what their future will look like in a few years. Maybe you are in a bit of debt, and aren’t sure if that will still be there 5 years from now, or are planning on a life change soon (such as having kids or buying a house). Basically, adding the convertibility to your policy allows flexibility for if you decide to change your mind down the road, rather than picking permanent coverage right off the back and deciding it’s too expensive, or not what you want.
If you have a lifelong dependent – a child with special needs, for example – your needs for life insurance may have changed. In this case, being able to convert to permanent life insurance later on will secure a trust fund for your child after you pass, and can give you an ease of mind.
Say you are in perfect health when you purchase your initial policy; that’s great! However, we know that health status can change as we get older, and may be a little less than what it was when you first bought life insurance. Buying a convertible policy allows you to remain assigned to the health class you were in initially, which could potentially save you a lot of money in premiums.
Accumulate Cash Value
One of the really nice perks about permanent life insurance that we previously discussed is its ability to accumulate cash value. What is cash value? In short, when you have a permanent life insurance policy, part of its price goes towards a “cash value” account, which increases over the years (tax-deferred, we might add). What you do with this accumulation is up to you. You can use it to help pay for premiums, or wait until it builds up and withdraw it for personal purchases. Keep in mind, it does take quite a few years to accumulate a significant amount of cash, and there is a fee for withdrawing it if you do so during the “surrender charge period” (this period length and fee amount varies depending on your specific policy).
Maybe you’ve done quite well for yourself, and were able to obtain a significant amount of money, as well as a nice property. Unfortunately, the nicer the estate, the higher the estate taxes. By converting to permanent coverage, your beneficiaries can use the money they get from your policy to help pay off those taxes.
Currently, the estate tax exclusion amount is $11,200,000. So if your estate is worth more than that, 40% of the difference will be owed in taxes. For example, if your estate is worth $12,000,000, 40% of $800,000 ($12,000,000-$11,200,000) will be owed in taxes – meaning your beneficiaries will owe $320,000 in taxes. Keep in mind, the tax exclusion amount and rate are subject to change.
Purchasing convertible term life insurance is a win/win. If you do end up having more expendable money in the future, and would like to convert to permanent life insurance, you have the option. If not, you can stick with your affordable premiums that come with term life insurance and ride that wave instead! Having that flexibility is what makes convertible term life insurance so great.
Renewable Term Life Insurance
If you’re looking for another option besides convertible term life insurance, you might be interested in annual renewable term (ART) life insurance. This type of term life policy is pretty much how it sounds, the contract lasts for one year, and renews annually. It offers you guaranteed insurability for a certain amount of years – typically 10 to 30 years depending on the person’s initial age – and provides a level death benefit. The premiums only stay consistent during the contract, so they will get more expensive each year you renew.
This type of policy may be good for those who only want to cover short-term debts, or are in between jobs and expect to get life insurance coverage from their future employer.
Is This a Better Option Than Convertible Term Life Insurance?
This is a tricky question – it depends on the specific person and their needs. Like we discussed earlier, if you only need temporary coverage and low, affordable rates, annual renewable term life insurance may be a better route for you to go.
However, if you’re looking for a longer term and have the funds, convertible term life insurance is probably your best bet. Your premiums will stay consistent until you convert (if you choose to do so). This is also a better option for those who have a worsening health condition. Like mentioned earlier, even if you decide to convert, you will still be placed in your original assigned health class when getting an estimate for your permanent coverage premiums. With ART, your premiums will get more expensive each year, even more so with a worsening health condition.
How Do I Convert My Policy?
So you decided to add the conversion rider, and are ready to make the change and convert your policy to permanent coverage; what are the next steps?
First things first, call your licensed life insurance agent (Term Life Advice has over 60 years of experience collectively), and discuss your plans to convert with them. Your agent will explain the process to you step by step.
Your agent will then discuss with you what your options are, based on your needs and financial abilities. As stated before, it is relatively common for people to opt for less coverage when they convert, simply because they don’t require as much as when they were younger.
Once you’ve decided on a permanent coverage option, your agent will create a life insurance policy illustration for you. The illustration is a hypothetical representation that reflects the assumptions your life insurance company will use to calculate your policy results. It is essentially meant to break down the policy in an format that is easier to understand.
After the illustration has been completed, your licensed agent will submit the necessary paperwork to your life insurance company. From there, all you have to do is wait until your carrier issues your new permanent policy; your agent will let you know when it has been issued.
Wrapping It Up
Now that you know the different types of term life insurance, you can decide which option is best for you. Annual renewable term life insurance is great if you just need temporary coverage, while conversion is a good choice if you know you’ll eventually want a permanent policy. In our opinion, it is better to add the conversion rider onto your term policy in the beginning rather than letting it go by and expire, wishing you had that option to convert. Plus, since so many life insurance companies offer the conversion rider for free, it’s even more of an incentive!
Buying life insurance can be stressful. If you’re currently looking to purchase a policy, give us a toll-free call at 855-902-6494. Our services are free, our agency can quickly compare your options and rates by asking you a few questions about your health and lifestyle, as well as assist in any other questions you may have.
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