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Should I Convert to Permanent Life Insurance?
So you’ve got term life insurance policy but are wondering if you should convert to permanent life insurance. Perhaps your term policy termed out and you’re left coverage-less, or you were always interested in a permanent policy and now are financially ready to consider a plan that can provide more bells and whistles. That’s where permanent coverage comes in, and we’ve got all the juicy details to help you decide if you should convert to permanent life insurance.
More affordable isn’t always more convenient
Often, when we first look into buying life insurance, we immediately get inundated with ads for term life insurance. A term policy is sold as the more affordable way to offer your family a financial safety net should the worst happen.
Getting a term policy costs less than permanent life insurance because it only provides coverage for a limited amount of time (usually between five and 20 years). There are no extra benefits, and it doesn’t offer options like the ability to build and access cash value over the long term.
Therefore, it can initially seem appealing because, well, who doesn’t like saving money on their repayments? Unfortunately, that’s where most of a term policy’s benefits end unless you die during your covered period and it pays out. But that’s not really something to celebrate as a win.
Your premiums are also likely to increase should you wish to renew once the cover ends. For example: if you get a 20-year policy at 35 it may only cost you $26/mon, but if you wish to renew when you reach your 50th birthday, you can expect to pay $130/mon, assuming you’re still in tip top health. That’s because the price for term life insurance increases as your age does and health declines. Potentially unavoidable things, unfortunately.
Essentially term life insurance coverage is simple in its makeup: pay into the policy each month for a certain number of years, and if the worst happens, your loved ones will receive a payout.
That doesn’t sound great. Why does anyone bother with a term policy?
On the surface, term cover doesn’t sound particularly enticing, other than the lower price. However, for some people, being insured for a specific number of years may be all they need.
They might wish to protect their family while building a nest egg. Then, once the mortgage is paid off on the family home and the kids have gone off to college, the policyholder may no longer feel the need to continue with the payments. In this scenario, term life insurance can be beneficial.
If, however, you want a little bit more from your coverage – building up a tax-free savings, for example – or decide you would like it to be ongoing, then you’ll need to convert to permanent life insurance. But is that the right option for you?
Should I Convert To Permanent Life Insurance?
Now that’s the million-dollar question. If it feels like a term policy isn’t really working for you, or you just want to take a closer look at your options, the alternative is permanent life insurance. A permanent life insurance policy shares some similarities with term, except it doesn’t expire and includes a whole lot more features, such as:
Cash value asset
One of the primary benefits of permanent life insurance lies in its cash value asset. Although seemingly more “expensive” coverage on the surface, a majority of each payment you make into your permanent life insurance policy actually goes towards a savings vehicle called “cash value” that accrues over time and can be accessed tax-free when you’d like to use it. This cash grows on top of your original coverage amount that you purchased and therefore your overall “death benefit” is growing, which means that even if you took out all the cash accumulated, it doesn’t affect what your loved ones receive after you pass.
0% interest loans
After a certain period of time (usually between 10 and 15 years), you can use the cash value accumulated, either drawing down the money or taking it out as a loan to spend on whatever you wish. If you decide to take it out as a loan, the interest rate is usually 0% after a certain amount of years. Which brings us to the next part…
Most investments require you to pay tax on your earnings. With a permanent life insurance policy, however, there’s no need to pay the taxman. It accumulates value over time and all of it can be accessed tax-free. So if you pay in for 20 years, you can withdraw the cash without paying any tax. How does that work you might ask? The money you take out, principal and growth, is 100% tax-free as you’re essentially loaning from yourself, which therefore isn’t subject to taxation completely tax-free. Your death benefit, which if you recall has grown over time with your original coverage and your cash value growing on top of it, then pays back the loan once you pass, with your beneficiaries receiving the rest.
Premiums that never increase
Unlike term insurance, your permanent plan is exactly that–permanent. This means that although your premiums may start out higher than term, it won’t increase for the rest of your life. You’re essentially locking it in at this current age and health and you won’t have to renew ever again.
Types of permanent life insurance policies
You may come across a few different terms when you start researching permanent life insurance policies. That’s because there’s more than one type of permanent option.
- A whole life policy comes with fixed-rate premiums and death benefits for the duration of the policy. As a result, the policy is guaranteed to earn a minimum amount of interest and payout dividends that can be used to reduce premiums or cash out
- Universal life insurance is an umbrella term for policies that allow you to increase the death benefit, reduce monthly premiums once you’ve accrued significant cash value, or invest your premiums for tax-free access later in life
- Variable life insurance lets you decide how you’d like to invest the cash value. You’ll get a prospectus with investment options ranging from S&P 500 indexes to growth funds and bonds, and again, all returns can be accessed tax-free compared to being subject to capital gains tax in a traditional brokerage
- Indexed universal life insurance allows you to grow high but safe returns on your premiums. Growth rates tend to reflect the returns of the market, but your downside is protective with a minimum floor of 0-1%. Therefore, your growth is locked in early, and you don’t lose money.
How easy is it to convert to permanent life insurance?
Ok, so you’re feeling good about permanent life insurance, but not sure how to go about transitioning your term to perm.Some term life insurance policies may allow you to convert them into permanent life insurance ones. Switching should be reasonably straightforward as long as your policy has a conversion option. The benefit here is that you can keep the health rating you received when you first signed on your term plan and may not have to go through the underwriting process again.
The con here, however, is that your term life insurance company may not offer the ideal options for the permanent life insurance plan you’re looking for. Often, term life insurance companies specialize in providing you a cost efficient term policy, but they may not specialize in offering the best permanent plans. Similarly, you may look into a Mercedes but their options for trucks may not be ideal.
If you want to check out what permanent options might be the most suitable for you, check out Amplify to get a quote for different life insurance options.
In conclusion: Time to make the switch?
First, it might be worth asking to see if your term is “convertible” and what permanent options are available. Then, learn a bit more about permanent life insurance plans and check out which options might be most suitable for you. Doing so can set you and your family up for financial success in the future, thanks to the ability to unlock cash accumulation in the policy, pass on wealth to loved ones, and enjoy tax-free benefits of permanent life insurance coverage.