Should You Convert Term Life Insurance to Permanent?
The main benefit of term coverage is the generally more affordable premium; however, it comes at the cost of higher risk. If you outlive your term length, you have a few options. You can convert to a permanent policy, renew your term coverage, or apply for a new policy at an older age and with any health conditions you may have developed since the start of your original coverage. These factors will all result in more expensive premiums. If you opt out of renewing or converting, you risk being left without life insurance, which may financially impact your loved ones in the event of your death. The premiums you paid are not refunded if you outlive your policy. In addition to higher risk, term life insurance does not come with the advantage of having a savings component the way many permanent policies do, limiting its impact on your financial planning. If you die within the term of your policy, your beneficiaries will receive the face value, or coverage amount, of your contract. If you are interested in reading more about what happens to term life insurance if you don’t die, you can read our article on it here.
Permanent insurance is just that – coverage that lasts for a lifetime. In addition to the face value of the death benefit, permanent plans accumulate value over time due to their built-in cash value component that is tax deferred. While the premiums are higher, a portion of what you pay is put towards the savings component, which has a higher growth rate than a typical bank savings account. There are several types of permanent policies, including whole, universal, and variable. Each type has similar components but is designed to meet different needs and comes with varying levels of risk. Whole life has fixed premiums, cash value growth, and a set death benefit. Universal policies may have adjustable premium payments and death benefits within the parameters of your individual policy. Under the umbrella of universal coverage, there are options for fixed rate, guaranteed, indexed and variable. The cash value component of a permanent policy adds flexibility to your coverage, as it can add to the value of your death benefit or be accessed during your life to supplement your retirement or other financial needs. Permanent insurance is an asset that can be used to create an immediate estate.
