One of the benefits of term life insurance is that it can provide affordable protection for your loved ones for a short period of time (typically 10-20 years). A downside is that since the coverage was only designed to be temporary, the price of the protection will start to increase after the original term is up.
Some term policies offer life insurance conversion privileges, which is the right to turn your temporary coverage into permanent protection.
While there may be limits on this feature — including how long the option to convert lasts, age restrictions, and guidelines on what permanent life insurance policies can be chosen — here are a few reasons why you might consider converting to permanent life insurance, if you have the option.
Benefits that can last a lifetime
With permanent life insurance, you own a policy that can last for your lifetime. You’ll always have it as long as your premiums are paid. Your policy is private and protected from probate and creditors to some degree in every state.
Your premiums now help build cash value
While traditional term insurance can have lower premiums, it doesn’t build cash value. Depending on the type of permanent life insurance policy you choose, you’ll have different opportunities to build cash value.
Certain whole life insurance policies allow for dividends and compound cash value growth. Indexed universal life policies allow you to be more flexible with the premium you pay and offer different options to build cash value and earn interest.
The accumulation of cash value can serve many purposes during your lifetime, including supplementing your retirement income, helping cover education expenses, and serving as useful emergency fund.*
Additional underwriting may not be needed
For most conversions, no additional medical underwriting is needed, allowing for your new permanent policy to be issued sooner. That’s a good thing, because your health could have changed from the time you qualified for your term life policy. However, be aware that some requests, like increasing the death benefit or adding on certain optional features, can trigger additional underwriting requirements.
Convert to meet your need
You typically convert only what you want to a permanent life insurance policy. For example, you may have purchased a $1 million term insurance policy when your children were young. If they are grown and on their own now, you may want a smaller amount of insurance.
Your life insurance conversion amount may be eligible to be less than what your death benefit was for your term life policy. You may be able to keep the rest of the unconverted term coverage in place (and convert that portion later, too) if you choose to. The earlier you convert, the more time you have to take advantage of the benefits of permanent life insurance.
Talk to your financial professional or insurance company to see if you may be eligible to convert some, or all, of your term insurance coverage into permanent insurance.**
*If tax-free loans are taken and the policy lapses, a taxable event may occur. Loans and withdrawals, if taken, will reduce the death benefit. Withdrawals (partial surrenders) and loans from life insurance policies that are classified as modified endowment contracts may be subject to tax at the time that the withdrawal or loan is taken and, if taken prior to age 59½, a 10% federal tax penalty may apply. Always consult with a tax advisor regarding your particular situation.
**Conversion options vary by term product.
This material provides general information that is designed to be educational in nature and is not intended as specific tax or legal advice to any particular individual nor the law of any particular state. Please seek the advice of a qualified tax or legal professional for your specific situation.
Products are issued by the AuguStar Life Insurance Company and AuguStar Life Assurance Corporation. Product, product features and rider availability vary by state. Issuer not licensed to conduct business in NY.