Learn about Conversion of Term Life Insurance
Is there term life insurance that offers conversion of your life insurance to a permanent policy?
If you are considering the purchase of temporary or term life insurance, you may be wondering about the option of conversion to permanent coverage.
What does conversion mean?
It’s simple. Conversion means if you own a term life insurance policy you have the option to convert your insurance to a permanent insurance plan, meaning, you will have life insurance that will never expire, you cannot outlive your coverage.
Did you know most term life insurance is convertible?
That means you can make your life insurance last your entire lifetime by converting some or all of your term insurance to a permanent policy.
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What is a Term Life Insurance Conversion?
A term life insurance conversion allows the policy owner to convert their term life policy into a permanent policy with "No Evidence of Insurability".
That means no additional underwriting is needed. No medical examination is required and no health questions are asked.
It’s simply paperwork that needs to be filed in order to convert your coverage to permanent insurance.
Many term life policies have a conversion feature to them.
However, each insurance company’s conversion rules are different.
Is My Term Insurance Policy Convertible?
If you don’t know, you’ll want to contact your insurance agent or insurance company and ask if your policy has the Conversion Privilege.
Or, you may review your life insurance policy and search in the contract for the section that explains the option of conversion.
The policy may state a date by which you must contact the insurance company in order to convert your coverage from term life insurance to permanent life insurance.
Reasons to Convert from Term Life to Permanent Life Insurance
Build Up Cash Value Savings in Your Policy
Part of the price for permanent life insurance goes toward a "cash value" account, which builds slowly over time and is tax-deferred growth.
You can borrow against or withdraw money from the cash-value life insurance. You can even give up the life insurance altogether for the cash.
Term life has no cash value.
Note: Usually it takes many years for the cash value to build substantially, and you pay fees for cashing out the policy during the "surrender charge period". That period lasts years and varies depending on the life insurance policy.
Now You Can Afford Permanent Coverage
You might have wanted some permanent insurance but passed at the price for universal or whole life coverage. Now that you’re making more money, you’d like to buy some guaranteed lifetime coverage.
Note: Convert only the amount of life insurance coverage you think you’ll need permanently. You may not have to convert the entire term insurance policy.
You Have a Lifelong Dependent
Perhaps your needs changed and now you have a lifelong dependent who relies on you for financial support, such as a child or adult with special needs.
Permanent life insurance can help fund a trust for that dependent person after you die.
Estate Planning and Conversion
You are making more money now and have more money and property than you expected.
The downside? Now you’re worried about the estate taxes your heirs will owe after your death.
A permanent life insurance policy can help. Your heirs can use the life insurance money to pay the taxes they may owe as heirs to your estate.
Note: State estate taxes vary. Federal estate taxes in 2017 are applied to estates worth more than $10.98 million for a couple or $5.49 million for a single person. (A spouse doesn’t owe estate taxes on an inheritance from the deceased spouse.)
Pre-Existing Health Problems
The insurance company doesn’t consider your current health condition when you convert a term life insurance policy.
That’s very important if you’ve developed health conditions that would make a new permanent life policy too expensive.
Note: If you’re healthy, compare pricing for a new permanent insurance policy and compare those prices with what you’d pay through conversion of your term policy to permanent life insurance.
Why is Conversion of Life Insurance Important?
Because, you may find that over time your insurance needs change as you get older and take on greater financial responsibilities.
And, your need for life insurance may change.
Although a term policy may have been a good idea when you started your coverage, you may find later in life you still need life insurance and you need it to last longer than your initial term (duration) of your term life policy.
That’s where conversion comes in handy.
If, after owning your term insurance for a while you decide you want permanent protection, you can contact your insurance company or agent and request to convert your term life to permanent life insurance.
Change in Coverage
When you convert from term to permanent, you have guaranteed lifetime life insurance protection, no matter how old you live to, as long as you pay your premiums on time.
Change in Premium
When you convert from term to permanent, you will be charged a much higher premium each year because permanent life insurance usually costs up to 2-3 times than term insurance.
Cash Value Growth Inside the Policy
Permanent (whole) life insurance policies may build up some cash value inside the policy over time, from which you may take a loan if needed. This cash value is considered an investment feature of the permanent policy and is one reason permanent coverage costs a lot more than term policies.
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