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Ask anyone approaching middle age if they wished they'd purchased a life insurance policy that could be converted to a permanent policy. Their reaction is likely to be a resounding "Yes." That's because term life insurance serves one purpose and permanent serves another. Here, we'll explain each type of life insurance, when term life makes the most sense, and when it's time to look into permanent life insurance coverage.
As the name implies, term life insurance is in effect for a specific period of time. With a term life insurance policy, a person decides how long they would like to be covered and for how much. Insurers typically require a medical examination to make sure the applicant is healthy enough to take out a new policy and coverage begins.
Because there are no bells, whistles, or perks that accompany a term policy, it is the least expensive way to buy life insurance.
According to the Insurance Information Institute, there are two varieties of term life insurance: Level term and decreasing term. With level term, the death benefit remains the same, no matter how long a person has had the policy. With decreasing term, the death benefit decreases over time, often every year. While it was once more common, it's relatively rare for someone to purchase decreasing term life insurance these days.
There are also renewable and "return of premium" policies.
At one time, renewable term policies were a big thing. With a renewable term policy, a person could keep renewing their life insurance policy up to a specific age, even if they were seriously ill or otherwise difficult to insure. Renewable policies are far more unusual now.
Typically, once a term policy expires you have nothing to show for it. With a return of premium policy, you get a refund of some kind (the size of the refund depends on the specific policy). However, you pay for this refund through higher policy premiums over the years.
Here are the typical terms associated with level term insurance:
Let's say a person has a 30-year term policy. They make payments on the policy for the entire 30 years but once that time is up, so is their coverage.
Permanent life insurance lasts a person's entire life, as long as they stay current with their premiums. While it's almost impossible to get a new term life policy once a person passes the age of 80, they can remain insured with a permanent policy until they die.
There are five primary types of permanent life insurance:
As long as premiums are paid, permanent life insurance never expires.
When a policyholder opts for a term-to-perm life insurance conversion, they are able to extend their life insurance. For example, if they had a 10, 15, 20, or 30-year term life policy, they can exchange it for a permanent policy rather than allowing it to expire. Here are a few other reasons a policyholder may request life insurance conversion:
When a young adult purchases their first life insurance policy, it's common to opt for term life insurance due to the lower cost and how easy it is to understand how term life works. As a person gets older and their career begins to take off, they may have enough money to consider a different type of life insurance.
Let's say someone purchases a term life policy at the age of 22. A few years later, their grandparent dies of a specific medical condition, and shortly after, a parent is diagnosed with the same condition that killed their grandparent. It would be natural for that person to worry that they may also inherit the medical condition. They're healthy today, but are concerned about what would happen if they became sick and no longer qualified for life insurance. Either purchasing a permanent life insurance policy or converting their current term life to permanent life offers peace of mind.
Life throws all kinds of curveballs and a person who once had a term life policy may suddenly realize that they need a policy that is guaranteed to last their entire life. For example, a person buys a large enough term policy to care for their spouse and children in the event of their death. As their children grow up, it becomes clear that one may never have the skills to live without assistance. Switching to a permanent life insurance policy means knowing that the child will be cared for, even after the parents are gone.
Three things happen when a person converts term life insurance to permanent:
By design, term life insurance policies build no cash value, so no, you cannot convert a term life policy into an annuity.
If a policyholder with a term life policy wants to convert it to permanent life, these are the steps to take:
The original term life policy contains language stating whether the policy is eligible for conversion to a permanent policy.
Some policies are referred to as "conversion period life insurance." Such a policy allows the policyholder to convert during a specific period. For example, with a 30-year term policy, the conversion period may be confined to the first 15 years that policy is in force. Occasionally, there's a term policy that allows the policyholder to convert at any point.
If a policyholder is unsure of the language used in their policy or confused about how the process works, their best bet is to reach out to their insurance company or agent.
Once a term insurance policy is converted to whole life, it never expires as long as premiums are paid. The policy begins to accrue cash value, although the annual premium will likely increase.
Conversion in relation to life insurance policies means changing the nature and rules associated with one policy to the nature and rules of another type. In the case of conversion from term to permanent life insurance, it means trading a policy that expires to one that is in effect for as long as premiums are paid.
The conversion itself is free, but premiums can increase by five to 16 times the cost of the term policy.
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