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Converting Term Life to Permanent Life Insurance

Recently, I was asked by several clients if they should “convert” their life insurance policies and if there is any benefit in doing so. Conversion does have its benefits, but can also have some disadvantages.

What do we mean by “conversion?” It simply means transitioning a term (temporary) policy to a permanent (typically cash-building) policy. The majority of life insurance policies allow for conversion. And, as with most things in life, there are both pros and cons.

The biggest difference you will notice right away is the cost. A permanent (or whole life) policy is typically eight to ten times the cost of a term policy. And since people are living longer, you could end up paying a large sum of money over your lifetime.

On a positive note, converting a term policy would offer you protection from being declined insurance based on a change in health. So, if you’ve suffered a major decline in your health the cost difference may be irrelevant.

Here are the basic benefits and drawbacks:

Benefits

  • Premiums remain the same throughout your lifetime
  • Coverage remains in place regardless of changes in weight, tobacco use, health or occupation
  • Policies typically build cash value which can be withdrawn or borrowed
  • If you convert a qualifying term life insurance policy to a permanent policy, the premium on the new policy may be reduced for the first year. (Based on premiums paid during 12 months prior to conversion.) Some term policies only allow for conversion during first five years—others will allow it at any point during the term.
  • May not require a medical exam
  • Option to convert your term policy at any time prior to age 75 (normally)
  • Permanent policies carry much higher premiums than term policies
  • Insurance needs change over your lifetime. You may not always need that coverage to cover financial obligations.
  • People are living longer, so you may end up paying a considerable amount of money over the life of the policy

Drawbacks

  • Permanent policies carry much higher premiums than term policies
  • Insurance needs change over your lifetime. You may not always need that coverage to cover financial obligations.
  • People are living longer, so you may end up paying a considerable amount of money over the life of the policy

The bottom line is that there is no one right answer. Every situation is different. If you have questions, talk to an agent or advisor you trust before you do anything. A good advisor will review your financial situation as a whole and then recommend the products that are in your best interest—not theirs.