If you have term life insurance, your insurance company will likely send you promotions periodically asking you to convert your term life policy to whole life insurance.
The company does this because whole life insurance comes with larger premiums and typically offers the company greater profits over the long run.
But are there instances when converting from term to whole life insurance would actually be a good idea for you? Here are three reasons to consider converting a term life insurance policy to whole life.
1) You Want to Build Your Wealth
Term life insurance is, by definition, for a specific period of time. Usually, policies last for 10 or 20 or 30 years or until a specific age, such as 65, 70 or 75.
This type of insurance is often all that a family needs. However, term life does not build cash value as time goes by. Rather, it only pays a death benefit.
Sometimes, as families’ financial situations change they may want to build their savings. Converting a term life policy to whole life can help them do this.
That’s because for a whole life insurance policy, also known as permanent life insurance, a part of the monthly premium is placed in a “cash value” account.
This account builds up a tax-deferred sum over time. You as the policyholder may also be able to borrow against the sum in the account, or even withdraw a specific amount if cash is needed. You may also be able to cash in the entire policy for a specific amount.
So is whole life a good savings vehicle?
The answer to that is both yes and no. For those looking to build up their savings and who need a specific payment structure to keep them disciplined and locked in to achieving their goal, a whole life policy could be of benefit.
However, there are many types of savings plans and tax-deferred accounts that offer higher returns than whole life insurance, so it may do you good to look around at all your options before making a final decision.
Another negative of whole life insurance is that it takes a longer period for the cash value to build up.
So, if you are older or are concerned about your financial situation, the possibility of not being able to keep up with higher premiums, then it may not be the savings solution for you.
You do not want to have to cash in the policy during its early years, or particularly during the “surrender charge period.” This could end up costing you a lot of money.
2) Your Financial Situation Has Improved
Another reason to consider converting a term life insurance policy into whole life is that you are making more money.
People often opt for term life earlier in their life to ensure a certain degree of protection for loved ones without breaking the family budget. As time goes on and a person’s income increases, then whole life insurance, even with its higher premiums, may become more attractive.
As we mentioned earlier, whole life insurance builds cash value which could help you increase or maintain your wealth as you make payments on the policy.
Having a whole life insurance policy, including a convertible whole life insurance PLI, can also be a good way to ensure that particular family members, including family members with special needs, are provided for after you are gone. For example, the policy proceeds could be used to fund a special needs trust.
Another benefit of whole life insurance is that it could provide money to your heirs to pay inheritance taxes if you have managed to build a sizable estate during your lifetime.
Estate taxes generally vary by state. Current federal estate tax rates range from 18% to 40% and in 2022 apply to estates with over $12.06 million.
3) You’ve Developed Health Problems That Make Getting a New Whole Life Insurance Policy Expensive
When converting a term life insurance policy to whole life, most insurance companies do not consider your current health or require you to take any physical exams.
This can be a big advantage if your health has declined in the time that you have had your term life insurance.
A Few More Things to Consider
Considering purchasing term life insurance now? There are a number of renewable term life insurance advantages and disadvantages you should be aware of before making a decision.
Advantages of this type of policy include:
- lower premiums
- simple, easier to understand policy language
- flexible cancellation
- temporary coverage so that you can grow out of it as your wealth increases
Disadvantages of this type of policy include:
- it does not build cash value over time
- this type of policy comes with uncertainty
- you will likely be aging out of the term policy when you are older and your health may make it difficult to get new insurance
This means if you are considering purchasing term life insurance now then you may want to look for a policy that is convertible to whole life later. This type of policy is called convertibility option term life insurance and it can be a great choice for many seeking insurance who want to maintain coverage as they age and go through life’s changes.
What you need to know: Many term life insurance policies are convertible by a certain deadline so be sure to make note of the deadline so that you can make the appropriate decision before it is too late.
Most companies will send you reminders about converting before the deadline so that you are aware that it is approaching.
Another thing you may want to do now is to review the whole life policies that are available via conversion so that you have a better understanding of your options should you decide to convert your term life policy later.
For example, you may want to take a look at which whole life policies include an extended term life insurance nonforfeiture option.
This option allows the policy holder to use the cash value of their policy to buy term life insurance for the original policy’s death benefit for a specific time period. This option can be valuable if there comes a time when you can no longer afford your whole life policy’s premiums.
What Is the Difference Between Porting vs. Converting Life Insurance
This concept applies mainly to life insurance offered through an employer. When you quit or retire, you may have the option of taking the insurance with you – this is called porting.
If you cannot take the insurance with you, then you may be able to convert that policy into another policy.
Be sure to get all your questions about term life and whole life insurance answered before making a purchase. As you can see there is a lot that goes into deciding what type of insurance is best for you and your current situation.
The best way forward is often to talk to one or more life insurance agents about their policies and options and to also do your own research and due diligence. Reading this article was a good first step. But don’t stop here, keep researching and learning. That way you can be sure to make an informed decision that helps you avoid mistakes that you may regret later on.
Featured Image: Megapixl