Should You Convert Your Life Insurance From Term To Permanent?

If you'll need some amount of life insurance coverage until you die, you may want to convert your term insurance to permanent - if you can.

Because term insurance covers just the 'pure' insurance component of permanent insurance, it's less expensive. But getting older and the occurrence of chronic health problems hurt your ability to renew your term insurance.

Permanent policies are good forever - no matter what happens to your health. They may lapse if you don't keep paying your premiums, but as long as there's enough money in the policy, the insurance will live on with you through age 100. So you can count on the death benefit always being there. A note is that at 100, you're generally given your benefit!

But, it'll cost you since age and health are still important factors. So it's best to convert while your health is still good and if you anticipate health problems later on.

If you have a term life policy or are considering buying one, be sure to understand the details of your conversion rights. See if there's a time table to convert. For some policies, the conversion option stops at age 50; others allow you to convert into your 60s or later.

The conversion option is generally into one of the insurer's permanent offerings. These cash value policies can be:

* Whole-life

* Universal life, or

* Variable life

Whole-life policies have fixed premiums and guarantees. Universal life lets you specify how large a premium you want to pay over the minimum needed to cover your 'the pure' insurance. Variable universal life combines the premium flexibility of universal life but lets you invest your cash value in mutual fund-like accounts. Unfortunately, there's no guarantee of growth in value.

If you don't wish to keep paying premiums, convert your cash value policy into a fully paid up policy of lesser death benefit. It all depends how much cash value you've accumulated.

Lastly, you can access your cash in your permanent policy if you need some. If you surrender your policy, you'd have to pay a surrender fee and tax on all your policy gains and have no life insurance.

It's best to just take out a policy loan. There's no taxation for a loan. Doing so will reduce your death benefit by the amount of the loan plus the (generally low) loan interest. But you don't have to pay the loan back. And if you pay enough to keep the loans in force until you die, then your policy beneficiary gets the remaining reduced (by your loan) death benefit tax-free.

If you decide you don't need the death benefit, you could convert your policy tax-free into an income annuity. You'll owe taxes only on a portion of each annuity payout, but you'll be assured of a steady stream of income for life or for a specified number of years.

at 4:20 PM
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