Converting Term Life Insurance to Permanent Insurance

Most term life insurance policies give the owners of the policy the option to convert to permanent life insurance. Although, from our experience, most people buy term life insurance because it offers lower premiums. Often overlooked is one of its main advantage of being able to change your term life into a whole or universal life without bringing proof of insurability. Often the process of converting is very simple and only requires filling out a form.

What are some of the advantages of convertibility

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Save your approval rating - In other words, if, when you applied for term life, you had been approved for select non-tobacco rates, even if your health has turned for the worst or you now smoke, you can convert your term policy to a permanent life insurance (whole life or universal life) and retain the select non-tobacco rating.
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Some exclusions are excluded - Most new policy have a common two year exclusions such as suicide, built into the insurance policy. Let say you have a ten year term and after 8 years you decide that you need a longer policy. If you just re-apply then the two year exclusion period starts all over again. But if you convert your term life policy to a permanent plan of insurance then the exclusion is usually waived.
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Life settlement - An often forgotten important aspect of life insurance is life settlement. In short, life settlement is the ability to sell your insurance policies face amount to a third party. For example, let say you need $70,000 cash ASAP and you own a $100,000 life insurance policy. So you call a life settlement company and they tell you that if you give them your life insurance policy, then they will give you $60,000 cash! You say OK and everyone is happy. By the way, once they tale over your insurance policy, you no longer have to pay premiums but you loose full control of the policy. When you die, they get their $60,000 back plus $40,000 (total $100,000). If you have a non-convertible policy, it is going to be impossible to sell the policy to a life settlement company. Unless you only have six months or less to live in which case you would most likely not sell the policy. Beware, as life settlement payments may be taxable.
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Mortgage life insurance - when taking out a life insurance to cover a mortgage, few people think of universal life or whole life. After all, since the mortgage term is well defined, then it would seem that term life is all you would ever need. Wrong! Let say you are a 35 year old with a 30 year mortgage. You most likely will select a 20 or 30 year term life insurance plan to cover the mortgage loan ins case of death. Now, 10 years into your mortgage you develop diabetes (common these days). Times get tough, you need to refinance your house. So now you cancel you old mortgage and take out another 30 year mortgage. Problem is, your 20 to 30 year term plan is now too short. So you shop around and because you have a per-existing medical condition, rates are either high or no one will insure you. Fortunately, you discover that your existing, preferred approved, insurance policy is convertible. You call the insurance company and convert to a permanent life insurance plan that will not only cover the length of your new mortgage but any other subsequent mortgages. Case easily solved!
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You are unlikely to outlive your coverage - As we get older and seem less invincible, our thoughts about life insurance changes dramatically. The end of a term insurance policy (or rising rates) becomes much more of an issue. Irregardless of how you feel when you first started your term insurance plan, know that you may be one of those people who may have some remorse about selecting cheap term life. Again, make sure that your term policy, even if the cost is a bit higher, is convertible to a good permanent life insurance. Keep this in mind: one study showed that the percentage of TERM LIFE INSURANCE policies that pay out is around 1%!

Convert to what?

That is a very important question. The fact that your policy is convertible is great but if you can only convert to a lousy whole life policy with very high premiums and low cash value, then the option is practically useless. When you take out a term life insurance policy, make sure to ask your advisor to give you sample proposals of plans that your policy is convertible to. Your term insurance policy should be convertible to at least two types of permanent whole life or universal life insurance. The new plan should offer lifetime rate guarantees. If possible one plan should be a high cash value life insurance whole life or universal life. Note that the name of the plan is irrelevant, its function is.

Another option

Although not as good as the conversion option, another overlooked option is ROP term (Return of Premium term). ROP term life insurance is often selected because it seems to give you an incredible option. With most plan, at the end of the term (15, 20 or 30 years) you get back all of the premiums you paid over the term of the policy. Another aspect of many of these polices is what is called paid up insurance. In other words, if you decide to stop paying on your life insurance policy after, let say, 20 years, a portion of the face amount will be yours forever even though you are no longer making premium payments. That portion of face amount that is yours forever can vary greatly from company to company. Ask for a proposal and read your approved policy carefully. Because only a portion of your policy can be yours for life, ROP term is not as good of an option when it comes to convertibility.

We hope this helped you understand the importance of term life insurance convertibility option. As each case can be very specific, we highly recommend that you speak to at least two advisors before making a final decision. As we say in all of out articles ask, ask and ask more questions, Be well.