Life insurance is a contract between an insurer and a policyholder wherein the insurer guarantees payment of a death benefit to named beneficiaries upon the insured’s death. It is a crucial financial safety net that ensures your loved ones are financially protected in case of your demise.
A term life insurance policy provides financial security and helps cover debts and expenses after your passing, for a period of time or term, usually between 10-30 years, with a level price. Permanent life insurance, on the other hand, is a type of life insurance policy that can provide lifelong coverage.
Permanent life insurance may also build cash value over time, which can be borrowed against or used to pay premiums. Many opt to convert/switch from a term life insurance policy to a permanent policy for various reasons. But why should people change from term life insurance to permanent life insurance?
This article is written as general education, and should not be considered as personal financial advice. If you would like personal guidance with life insurance, you can schedule a time to talk with one of our experts.
1. Building Tax-Advantaged Savings
A permanent life insurance policy can serve as a long-term savings vehicle. As you pay your premiums, the policy may accumulate cash value, which may be able to be withdrawn, borrowed against, or used to pay premiums or policy charges. It can provide emergency funds or a way to save for future financial goals. If the cash value accumulation remains in the policy it may even increase the death benefit that would be paid to the beneficiary.
2. Covering Funeral Expenses
Funeral expenses can be a significant financial burden for your loved ones after your passing. A permanent life insurance policy can help cover these expenses, ensuring that your family is not burdened with the cost of your funeral and providing your loved ones peace of mind and financial security during a difficult time.
3. Legacy & Estate Planning
Some people may switch to a permanent life insurance policy for legacy or estate planning purposes. If you have a significant estate, permanent life insurance policies can provide a death benefit that can be used to pay estate taxes, estate equalization, or used to fund trusts. It can help ensure that your legacy is protected and will continue after you pass away.
4. The level term period of an existing term policy is running out
Another reason people may convert/switch to a permanent life insurance policy is due to their term insurance policy coming to an end. For example, if you purchase a 10 year term insurance policy and you are nearing the end of the 9th year but would still like to continue your coverage until your death, you might convert.
5. Sudden Health Changes
A common reason that people convert to permanent life insurance is a sudden health change. If you were to develop a chronic illness or suffer a significant health setback, your ability to medically qualify for a new life insurance policy may be compromised. Your existing term insurance may provide a contractual option to convert from a policy that will only last a certain period of time to a permanent life insurance policy that would be guaranteed regardless of the change in your health. It can provide you and your loved ones peace of mind and financial security.
5. To Cover Long Term Care Costs
Some people switch to a permanent life insurance policy to take advantage of its ability to double as a long term care insurance, through riders (learn more about riders here). This protection can help pay for the costs of custodial and personal care, such as the cost of getting in-home care or staying in an assisted living facility. It may also pay costs of care related to chronic illness, injuries, or disabilities.
Conversion verses Switching
Converting your term insurance is a specific contract provision that you may have access to. This provision allows you to change from a term policy to a permanent policy, without evidence of insurability (no underwriting/exams), during a specific period of time. This will result in a new premium based on your age, the death benefit amount, the type of policy you choose, and the health rating you had when you were offered the original term life policy.
Some term life policies do not have a conversion privilege, which means that if you want to switch from term insurance to permanent, you would need to apply for and purchase a new permanent policy. Doing this may include additional underwriting, potentially including a medical exam. This is called a replacement, where you get rid of one life insurance policy for another.
If you need help determining if your existing policy has a conversion option or would like additional help on what may be the best life insurance solution for you, White Swan can help.
Converting/switching from a term life insurance policy to a permanent one is a significant decision that should be carefully considered based on your financial situation and goals. Term life insurance offers benefits such as a lower premium and coverage for a specific period of time.
It is important to note that permanent life insurance policies may typically have higher premiums than term life insurance policies because they last until the insured’s death and may provide cash accumulation.
White Swan is dedicated to helping our clients achieve their life insurance goals.