There are many types of life insurance policies that can help protect you and your family. Term life insurance can be an attractive choice for younger individuals who are looking for affordable coverage, especially if they’re not ready to commit to permanent life insurance, such as whole life. Even better? While a term life policy provides coverage for a defined length of time, there are policies that can be converted to permanent life insurance for part or all of the coverage period down the line. Permanent life insurance also has some key living benefits on its own for those who may be want to take advantage of those benefits now.
Here are a few key considerations to help you determine whether a term-to-perm conversion option is a good starting point for obtaining protection for your loved ones.
A closer look: term life insurance
These type of policies are often more affordable than permanent life insurance policies because of their lower premiums and flexibility, including coverage that lasts for a specified amount of time, such as a 10-, 20-, or 30-year term. On some term life products, unique riders1 may also be available, such as the ability to donate an extra 1 percent of the death benefit — over and above the amount paid to the designated beneficiaries — to any qualified 501(c) (3) charity of the policy owner’s choosing.
A closer look: permanent life insurance
Permanent life insurance, like whole life, can be an option for those looking for life insurance coverage with additional unique benefits beyond traditional death benefit protection. A whole life insurance policy doesn’t expire as long as you make your premium payments on time. Permanent insurance policies typically combine a death benefit with a unique living benefit – its cash value.3, 4 This benefit can be used however the policyowner needs or wants. Unlike some other savings vehicles, such as certain retirement plans, there are no restrictions on what you can use the cash value for, or when you use it. This can be a great way to save for larger goals like a home purchase or college savings. Additionally, unlike some of those savings vehicles, cash value is not invested in the market and so it is insulated from the ups and downs of market events. When choosing permanent life insurance, you typically have a choice between whole life and universal life.5, 6, 7
The primary purpose of life insurance is to ensure beneficiaries receive an income tax-free death benefit after your passing. Having whole life insurance does this, but also may make it possible to fund opportunities or unexpected expenses without tapping into an existing savings account.8 While term life pays beneficiaries after you pass, that coverage term could end first. That’s where the benefits of converting to a permanent life insurance policy come into play.
Benefits of a permanent life insurance policy include providing cash value9 to potentially help fund:
- Your retirement
- Education for you or a dependent
- College savings
- A new home or improvements on your home
- A gift to a family member
- Donations to charity
One key note: You may have heard others mention how expensive permanent life insurance policies are, or that they only pay funds after your passing.10 Yes, permanent life insurance policies indeed cost more than a term life insurance policy, but that is not the entire picture. It’s key to remember that a whole life policy will protect you for life, not just a set amount of years, and is providing additional benefits during your lifetime.
When it comes to costs, your income should be one of the many factors you take into consideration when shopping for a life insurance policy. That’s why many people look at the types of policies that are available and choose one that fits their budget. If that means choosing a term life insurance policy first and converting it later, then you can still reap the benefits of that conversion while ensuring protection today.
Making the conversion: benefits for now and later
Permanent insurance policies offer benefits that term policies don’t, so many find that it’s helpful to use them together.11 Converting from term to permanent life insurance means you’re converting all or some of your term life insurance into permanent policies, like whole life or universal life.
While most policies include the option to convert, you may be able to add the option as a rider if it isn’t included in the policy. So, even if you decide to buy term life insurance now, you may have the option to convert it to a permanent life insurance policy later12. As your income increases and your protection needs change, your life insurance strategy can change with you by potentially converting to a whole life policy later.
It can be beneficial to work with a financial professional who can help you plan for a more protected future.
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