Term life insurance can be a very affordable solution for someone who wants to take care of their loved ones should the unexpected happen. If you don’t buy a term policy with a conversion clause built in, however, it can turn out to be a costly mistake.
If you’re considering buying a term life insurance policy, here’s something you should know about its future — and yours. Don’t wait until it’s too late.
Term Life Insurance
A term life insurance policy has a specific time limit on the coverage period. It’s sometimes referred to as temporary insurance. Once the policy is set to expire, you would need to decide whether to renew it or let the coverage end.
For example, let’s say you’re a 45-year-old man and you have a 20-year guaranteed level term policy with a death benefit of $250,000. That could cost around $30 a month, with a medical exam required. If you die before that 20 years is up, the insurance company pays the death benefit. That’s pretty straightforward.
The problem is, if you outlive the 20-year term — and there’s a good chance of that happening if you are in good health — the contract expires and the insurance company keeps the premiums. End of story — and a sad one at that.
Term life insurance is more or less a precaution against the unexpected. It’s designed as temporary insurance and it isn’t necessarily intended to pay out. And the cost pales in comparison to a permanent option, like variable, whole or universal life. For many people, though, the only way they can afford the coverage they need, for the time period when they need it, is through term life insurance.
It might be good idea for young families just starting out. When you’re young, you might be in search of a policy with a large death benefit to replace your income and provide for any children should the worst happen. Having that kind of policy might not be as important, however, after you’ve paid down the mortgage and the children have grown up and moved out of the house.
Eventually, the temporary policy can and should be converted to permanent policy — term to perm, so to speak.
Converting Term to Permanent
A clause is written into many (not all) term life policies that allows the policyholder to convert the temporary policy into a permanent policy, as long as it’s done within a certain time frame or by a certain age, such as 75 years old. Think of it as leasing your insurance policy with the option to buy it at some point. This conversion clause does add to the cost of the original term policy a bit, but it’s worth it because you will be able to change your temporary policy into a permanent one without having to re-qualify or undergo a new physical exam.
“I sense some light bulbs going on with folks who are unfamiliar with term insurance and permanent insurance by equating insurance to housing,” said True Blue Life Insurance agent Bob Young. “Purchasing term insurance as opposed to permanent insurance is similar to renting vs. owning. The landlord has no obligation to extend the rental period. He/she will try to evict you forcibly by raising your rent so much you won’t want the place anymore when your term is done. Maybe you’ll be able to find another place to ‘live’ if everything is okay with your health and you aren’t too old. The health part is a crapshoot and getting old is most likely going to happen.”
Oddly, according to insurance industry think tank LIMRA, only one to two percent of term life policyholders actually take advantage of this option — a mind-boggling statistic.
Here’s how it works: Let’s say the 45-year-old man in the aforementioned example has a 20-year term policy, but it includes a 10-year conversion clause. Maybe nine years into the life of the contract, he develops a health issue, like heart disease or diabetes. Because he’s still within his 10-year conversion period, he is free to convert that temporary policy to a permanent one without having to go through a new physical exam. So he would wind up with the same coverage at a lower annual premium than if he were to have to start all over with a brand new policy.
If the term policy had been written without this conversion clause, the policyholder would be faced with an expiring policy and costly renewal premiums — that is, if he was able to get insured at all, given his updated and unfortunate medical condition.
“If you can’t afford or don’t want permanent coverage from the outset, but you believe there may be a need to have some form of coverage in the future, come what may, then rent with an option to own, so to speak,” Young continued.
Additionally, even if you don’t develop a health issue, you are getting older. There’s no way around that for any of us. So when your term policy expires and you start from scratch looking for a new policy, it will be considerably more expensive for you to get insured. If you can start paying on a permanent policy in your 40s — or better yet while you’re still in your 20s — the monthly premium will be far less than someone in their 50s would pay.
Permanent Life Insurance
Permanent life insurance covers the insured for the rest of his or her life. By converting a term policy to a permanent one, you can enjoy the advantages. Permanent life insurance (like whole life) offers premiums that stay the same, providing your family with protection throughout your entire lifetime. A permanent life policy also builds cash value, which can be withdrawn or borrowed during your lifetime. Plus, by converting term life to a permanent life or universal life insurance policy, the new policy’s first year premium could be reduced.
As you get older, you will likely have more earning power and may want these useful savings and investment features that come with a permanent life insurance policy. You could possibly use it for retirement or as a loan later in life. And that cash value accumulation can strengthen your overall portfolio, too.
Your Term to Perm Life Insurance Policy
When buying term life insurance, do yourself a favor and get a policy that can be converted — a policy with a conversion clause built into it. And be sure to convert it before it’s too late. A licensed True Blue Life Insurance agent can help to explain your options and help you you find a term life policy — with a conversion clause — that’s just right for you. And they can explain the oftentimes confusing differences between the permanent variable, whole or universal life insurance policies in advance.
Talk with one of our agents today and begin the process of getting a term life insurance policy with a conversion to permanent clause. Just call 1-866-816-2100.
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