Saturday, September 1, 2007

How to Convert Term Insurance to Permanent Insurance

by Staff Expert


Virtually all individually owned term (temporary) life insurance policies allow you to convert some or all of the coverage to a permanent plan. Keep in mind that premium payments for permanent life insurance generally are many times greater than term premiums.


Difficulty: Moderately Easy

Determining the Value of Conversion

Step One

Decide if your beneficiary(ies) will be financially impacted by your death, no matter how long you live.

Step Two

Write down the total amount of death benefit from all term life insurance policies that you currently own, but do not include it in the next three steps.

Step Three

Roughly estimate any debt in your financial or retirement planning that is never likely to be paid off, such as a home mortgage.

Step Four

Consider the likelihood that, given your own or your parent's medical history, you may incur large medical bills near the end of your life.

Step Five

Add to those estimates the cost of final expenses, such as funeral, burial plot, and administrative settlement of your estate.

Step Six

Against those three approximate amounts, calculate how much your surviving spouse and/or children would have to live on after your death.

Step Seven

If the amount in #6 far exceeds the sum of #3, #4, and #5, you probably don't need the death benefit you wrote down in step #2, and it can be allowed to lapse when you feel it is no longer needed.

Step Eight

If the sum of #3, #4, and #5 is much greater than the dollar amount in #6, consider covering the shortfall by converting some or all of your term insurance to permanent insurance.

Tips & Warnings

The earlier you convert, the lower your permanent premiums will be.

Carefully read the "Right to Convert" section of your term life insurance policy to determine what types of permanent insurance your company will permit.

For most term policies, you do not have to undergo medical review to qualify for permanent coverage.

If your policy guarantees your right to convert at the underwriting rating for which you originally qualified, consider going through full medical underwriting, especially if you are a better health risk now than you were when you got the term policy. You may qualify for a better rating.

Unlike term policies, most permanent life policies build a cash value.

You can only convert term within the same insurance company, and the choice of permanent plans to which you are allowed to convert may be very limited.

Unless specified in the contract, you don't have to convert the full term death benefit to a permanent policy.

Making the Conversion from "Term to Perm"

Step One

Consult with the same agent from whom you bought your term policy, or call the home office of the company that issued the term policy for the name of a local agent.

Step Two

Review the features of whatever permanent plans are allowed under the conversion section of your term policy.

Step Three

Decide which plan will provide you with the best benefits at the lowest cost.

Step Four

Sign the appropriate paperwork for the conversion, making sure you get a copy.

Step Five

When the new policy arrives, read it over carefully to make sure it was issued according to your instructions.

Step Six

Make a copy of the policy and place it in a secure location (such as a safe deposit box), but keep the original with other important papers at home.

Tips & Warnings

  • If you only converted part of your term policy to a permanent contract, you can keep the remainder of the term coverage in force by having the insurance company issue a new term policy with the lower face amount and paying the premiums until the end of the term.

  • Until your new policy arrives, keep paying premiums on your old term policy in full and on time (any overpayments will be credited or refunded).

  • This is a good time to make any beneficiary changes that are necessary.

  • Promptly return any policy that is issued with mistakes or incomplete information so that a new, correct policy may be issued.

  • Life insurance policies are legal contracts and should be treated with the same attention and care you would give to other important family documents.

  • It is generally not a good idea to put original life policies in a bank safe deposit box as it may not be immediately accessible at your death.

  • Resist attempts by any insurance agent to sell you more life insurance than you need by being firm about the dollar amount of coverage you want.

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