Term life insurance policies are temporary, but you can convert to a permanent life policy if you have a "convertible" term life policy.
Though most term life plans are convertible, most policyholders don't take advantage of it. Instead, they let the term life policy lapse and then buy a new term life policy or go without coverage.
There are many instances when converting to a permanent life insurance policy makes sense.
Converting from term life to permanent life
Term life insurance policies are for a certain period -- 10, 15, 20 or 30 years. They are less expensive than permanent life insurance, but you will also likely outlive a term life policy, which means you won't actually benefit from getting coverage. Permanent life insurance, on the other hand, covers you until you die.
The good news is that most term life insurance policies are convertible, so you can change it to a permanent life insurance policy. Convertible policies usually include a limit as to when you can convert, and that's often before your term life policy is up. Those policies also require you to convert by a certain age, somewhere between 65 and 70 depending on the company. So, you don't want to wait too long.
Another reason why you shouldn't wait to convert a term life policy -- premiums are based on age. The longer you wait, the higher you'll pay for permanent life insurance premiums when you convert.
If you decide to convert to permanent life, you can convert your whole policy or just a portion, but remember that it will cost you more if you wait until you're older.
Reasons to convert from term life insurance to permanent life
Converting to permanent life insurance isn't for everyone, especially for people who can't afford the higher permanent life premiums. Here are six reasons why you should think about converting:
1. Permanent life has a cash value
Permanent life policies allow you to withdraw money. This gives the flexibility of knowing you have an emergency savings source.
It's not wise to tap into your life insurance unless you've exhausted all other funding sources. You'll pay fees if you tap into your life insurance and your survivors won't get that life insurance money when you die.
It's a good idea to think of permanent life insurance as a tax-free savings policy for your survivors. Don't tap into it while you're alive unless you've exhausted all other funding sources.
2. Your survivors are likely never going to collect on your term life policy
Term life is often a more affordable option alternative, and there's a morbid reason for it. You will likely outlive your term life policy, which means the insurance company won't have to pay up. However, an insurer will have to pay for a permanent life insurance policy eventually.
You can think of term life like any other insurance. You pay into it like health insurance and auto insurance, but you don't actually get anything back unless you file a claim or need services.
Permanent life, on the other hand, is more like an investment. You or your survivors will ultimately get the money back either when you die or if you take cash out of the policy.
3. You're financially better off than when you bought your term life policy
Permanent life insurance is more expensive and some people, especially those just starting out, can't afford it. This is especially true if you have a health problem.
However, as you age, you'll likely make more money and improve your financial situation. That's a good time to convert to a permanent life policy. Permanent life will cost you more than term life, but it will also provide you with savings for your survivors or to use as an emergency fund or retirement fund.
4. You have health issues
You may not need to have a medical exam if you convert from a term life to permanent life policy. If you instead decided to let your term life lapse and then apply for another plan, you'll need to have a medical exam. So, in effect, you may sidestep a medical exam when you convert to a permanent life policy.
When you convert, the insurance company will likely give you the same health rating as the term life policy -- even if you had that medical exam years ago.
Make sure to check with your policy about the time period in which you don't need a medical exam. If you got your term life policy decades ago, your policy might still require you to get a medical exam.
5. You have dependents who may need financial help after you die
You can even think of your permanent life insurance plan as a savings account to care for your children after you die. This is especially true if a child will need financial help for his or her care, such as if the child has medical needs or special needs.
Converting to permanent life can leave money behind for the child's care.
6. Premiums remain the same for the rest of your life
Permanent life insurance locks in rates, which you will pay until you die, so you won't have to worry about rate increases or needing to change to another term life policy.
You'll likely pay more for premiums on a permanent life policy compared to a term life policy. Keep that in mind and decide whether you have enough disposable income to pay the higher rates.
Questions to ask about term life insurance
If you have a term life policy or you're interested in getting one to convert to permanent life eventually, here are some questions to ask:
- Is the policy convertible? Most term life policies are convertible, but you'll want to confirm for your policy.
- What's the deadline? Convertible policies only let you convert during a specific period. This could mean from when you get the term life policy and your age.
- What are your conversation options? Policies vary by company so you'll want to find out your options if you plan to convert eventually. Your term life is a commodity, so don't just go with the cheapest policy. Find the highest quality.
Shop around for life insurance
Whether you want a term life or permanent life policy, don't just go with your parents' insurance company or the ones with the cutest TV ads. Instead, research multiple insurance companies' life insurance policies and see which one makes the most sense for you.
You might be tempted to go with the cheapest one, but make sure you compare each plan and company, so you're comfortable that you're making the best decision for your situation.