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Why Convert Term Life Insurance to Permanent?

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By Jeffrey 'Yitz' Stern

Many people buy term life insurance when they are young, because it is the most affordable way to protect a growing family from year to year. Term insurance offers basic death protection, often in policies that are annually renewable. Since the probability is very low that a person under age 40 will die in a given year, term insurance can be cost-effective for this need.

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However, three important changes occur as we mature:

1. As incomes rise, we can afford purchases above the "budget-level" – in life insurance as well as other types of goods and services. Rising income also increases tax planning needs.

2. The cost of annual renewable term insurance keeps rising each year, because the probability of death increases with age.

3. As people mature they begin to participate more in long-range financial planning, which can include assuring the continuity of their businesses or passing assets to heirs through their estates. Their need for life insurance becomes more permanent.

Permanent life insurance often works better than term to accommodate these changes. The types of permanent life insurance available include whole life, universal life and variable universal life. In each case, premiums may be somewhat higher than in term life insurance but policies can build cash value, in addition to death benefit protection.

Cash value can be used as collateral for tax-free loans, and it also may be withdrawn for tax-advantaged retirement income or other needs. Since few people can afford to pay term insurance premiums at very old ages, permanent life insurance is the best way to make sure life insurance will remain in force a very long time. In fact, the premiums in later years usually can be paid without any cash outlay, by applying cash value.

A financial professional can help you evaluate whether it may make sense to "graduate" from term life insurance to permanent. If so, you may want to take advantage of an option called a "term conversion." In specified term life insurance policies, you may be able to qualify for such a conversion without submitting to extensive medical underwriting, including a physician exam. The same amount of coverage you enjoyed in the term policy can continue in your new permanent policy. In addition, you may even qualify for a term conversion credit that can accelerate your cash value in the new permanent contract.

In selecting the best type of life insurance for your personal needs, it pays to know your options. Even if you don’t believe a term conversion makes sense now, it’s a good idea to learn how it works and keep it in mind as your income grows and your planning horizon expands.

Jeffrey (Yitz) Stern is a financial advisor and is the managing partner of National Planning Corporation in Hollywood, Florida. For a review of your financial plan and for career opportunities you can reach Yitz at 954-862-5440.

 


Posted by Jeffrey 'Yitz' Stern on 09/26 at 04:26 PM • Hits: 152



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