As we go through our adult lives, it’s typical for most people to accumulate substantial debt when buying homes, automobiles, investing in retirement plans, opening a business, or starting a family. Throughout our younger years, when plenty of life insurance coverage is necessary because of our debt, the most reasonably priced type of life insurance to cover these debts is term life insurance.
Despite the fact that term life insurance isn’t viewed as permanent insurance, most people are aware it is the most affordable way to obtain the amount of life insurance required to cover a pile of debt, make up for lost income, and pay for college education costs. We eventually, however, reach a place in our lives when permanent life insurance will make much more sense, but the most harmful thing you can do is to cancel your term insurance policy and then search for permanent insurance like Whole Life or Universal Life. This might very easily result in a lapse in coverage which is a huge miscalculation.
Term Life Insurance
Like any other type of life insurance, the rates for a term insurance policy are predicated on various underwriting factors that the insurer will use to determine your insurance rates:
- Your health history and the health history of your family
- Your age at the time of application
- Your driving record for the last three to five years
- Your occupation and the industry you work in
- The kinds of prescription drugs you take and why you take them
- If you travel to hazardous areas
- Any hobbies that are considered dangerous – skydiving, scuba diving, mountain climbing, and piloting personal aircraft
For adults who are just starting out, term insurance is very inexpensive with rates that can be guaranteed for up to thirty years. But, when your policy finally expires, most insurers will offer a yearly renewable policy based on your age at the time of your renewal and each renewal after that. If you are able to stay healthy when your policy runs out, you may be able to buy another inexpensive term policy with a 10 or 20-year term as opposed to agreeing to the annually renewable offer from your insurance company.
However, if you are like most working Americans and have focused on your job rather than your health, you’ve most likely developed some health problems and would be much better served by converting your term life insurance into permanent life insurance that stays active for the rest of your life.
Additionally, since it’s very likely that your debts have been dramatically reduced over time and your kids have gone off to college, the total amount of insurance you need will also be significantly reduced. This is the time in your life when the conversion rider is especially critical to a policyholder.
Your Conversion Privilege (Rider)
Your conversion privilege is most likely the most valuable component other than the death benefit of your term life insurance policy. This rider allows you to convert all or a portion of your insurance policy. In many cases, the insurer will set time limits for you to request the conversion.
This rider allows the insured to convert all or a portion of your term insurance to permanent insurance without having to prove you are in good health and can easily reduce the cost for the attained age rating used for the new permanent policy.
Conversion Case Study
Dan is a 45-year old male non-smoker who bought a $1 million dollar 20-year term policy when he was 25-years old. Dan’s term policy is about to expire and Dan prefers to go forward with a permanent Universal Life policy that his insurance company is offering rather than renew his term policy every year at a much higher rate. Dan’s current term policy has been costing $34.00 per month.
Dan is somewhat concerned because he has developed diabetes II and high blood pressure over the last ten years but his agent has assured him that his new health issues will have no impact on his new insurance rates, only his age.
Over the years, Dan has managed to pay off most of his debt and his son was able to go to college on a full-ride athletic scholarship. At age 45, Dan and his agent agree that he can reduce his death benefit to $250,000 for the new universal life policy.
Dan and his agent were able to find a $250,000 Universal Life Insurance policy for $146 per month that will cover him for the rest of his life and build cash value that he can access if he needs emergency cash and Dan was able to circumvent the health underwriting which would have revealed his diabetes and high blood pressure diagnosis.
The Bottom Line
When purchasing term insurance, always insist on a conversion rider from the insurance company and make certain the company offers competitively priced Universal Life Insurance for the conversion. When young adults purchase term life insurance which is temporary, they should always be thinking in terms of lifetime coverage because eventually, that term policy is going to expire.
Since life insurance purchases are typically driven by life events, it makes great financial sense to purchase as much life insurance as you can comfortably afford and in most cases, term insurance will be the product of choice. But, if you will insist on an insurance policy with a conversion privilege, you can always convert that temporary insurance to permanent insurance and not have to be concerned about whether you will be healthy enough to afford the new permanent policy.