Term life insurance provides affordable, temporary coverage, which is all many families ever need.
You buy term life to cover you for a specific period, such as 10, 20 or 30 years, and your beneficiary gets a payout if you die within that time frame. Ideally, by the time the coverage expires, you don’t need life insurance anymore. Your kids have grown up, your debts have been repaid, and you have plenty of savings.
But what if your needs change?
Most term life insurance is convertible. That means you can make the coverage last your entire life by converting some or all of it to a permanent policy.
Most term life insurance is convertible. That means you can make the coverage last your entire life by converting some or all of it to a permanent policy, such as universal or whole life insurance. And you can convert it without taking another medical exam or answering health questions, as long as you do so within a certain time frame or by a certain age, such as 75.
The deadline for converting and the type of permanent policies available depend on the life insurance company.
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Why go from term life to permanent life
Here are reasons you might convert your term policy to a permanent one.
Part of the price for permanent life insurance goes toward a “cash value” account, which builds slowly tax-deferred. 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.
Good to know: Max out contributions to your tax-advantaged accounts and consider other investment vehicles before you buy permanent life insurance as a savings builder. Don’t buy permanent life insurance unless you can stick with it for the long haul. Generally 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 policy.
Now you can afford it
You might have wanted some permanent insurance but balked at the price for universal or whole life. Now that you’re making more money, you’d like to buy some lifelong coverage.
Good to know: Convert only the amount of coverage you think you’ll need permanently. You may not have to convert the entire term life policy.
Perhaps your needs changed and now you have a lifelong financial dependent, such as a child with special needs. Permanent life insurance can help fund a trust for that person after you die.
Good to know: Work with a financial advisor and an attorney who specialize in helping clients with special needs children. The financial advisor can help you plan and select the best policy. The attorney can help you set up a special needs trust.
You made it big and have more money and property than you ever expected. The downside? Now you’re worried about the estate taxes your heirs will owe after your death. Permanent life insurance can help. Your heirs can use the life insurance money to pay the taxes.
Good to know: 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.) Here’s a map of state estate and inheritance taxes from the Tax Foundation.
The insurance company doesn’t consider your current health condition when you convert a term life policy. That’s a large advantage if you’ve developed conditions that would make a new permanent life policy too expensive.
Good to know: If you’re still healthy, get quotes for a new permanent policy and compare those with what you’d pay through conversion.
Shopping for term life insurance
Before buying a term life policy, follow these tips if you think you might to convert it later on:
- Make sure the term life policy is convertible
- Understand the deadline for converting
- Review the permanent policies that will be available if you convert