Monday, November 2, 2009

Should I convert my term life insurance to a permanent policy?

life insurance rates

Term life insurance is affordable life insurance for a fixed number of years -- and often a stable premium -- but there is no cash value or investment component to this type of policy. However, some term policies let policyholders convert to permanent life insurance with a cash-value component that can be tapped later in life. Members of the Financial Planning Association of Greater Indiana may be able to advise you on this matter. You can visit its Web site at

Ron Hanson, Hanson & Snyder

The purpose of life insurance is to manage risk.

As a quick review, term insurance builds no cash value and lasts for the period of time it is issued for, such as 10, 20 or 30 years. Permanent insurance has a cash-value component and can last a lifetime -- even if the policyholder lives to 100 or beyond.

Term insurance is oftentimes used to cover an expense that may be eliminated when the term policy was designed to end. Permanent insurance may be used to replace capital; provide a stream of income; provide capital during a transition, such as the death of a business owner, key person or family member; or pay estate and inheritance taxes.

Some term policies have a provision allowing the policy to be converted into a permanent policy prior to when it terminates. Should a person become uninsurable or the premium rate at which a new policy would be issued be increased due to a person's health condition, a person may wish to consider converting term coverage into a permanent policy to have protection moving forward.

There is no simple answer to this question. A thorough review of the individual's needs, objectives and wishes is a prudent manner to arrive at the answer best for each individual situation.

A discussion with a financial professional knowledgeable of the many facets of financial planning and risk management is recommended.

Penny C. Lutocka, London Witte & Co.

Life insurance should be an integral part of your financial program.

If you're considering converting your term insurance to a permanent policy, there are several factors to consider:

What is your age? Term insurance is inexpensive initially, but as you get older, premiums can increase. Permanent insurance premiums remain level.

When does your term policy expire? Most term policies are not designed to last a lifetime, only to fill a need should you die early. Permanent insurance will not expire as long as you pay the premiums.

Have you developed health problems? Many term policies have a conversion feature that allows you to convert to permanent insurance without having to re-qualify or undergo physical examinations.

When does your conversion clause expire? Even if you haven't developed health problems, you may want to convert before you lose the opportunity.

What is your investment plan for saving for the future? Many permanent insurance policies provide guaranteed death benefits along with cash value, or a savings component, that grows tax-deferred. You can borrow from this cash value to supplement retirement, college funding or other needs. Some policies let you select the funds in which you invest.

You may choose to convert all or part of your coverage. Review your policies with your insurance agent to see what is best for you.

Lutocka is a certified financial planner and certified public accountant.

Michael D. Fields, Comprehensive Retirement Solutions

The ability to convert a term policy allows for flexible life insurance planning.

Specifically, it allows people to inexpensively purchase all the coverage they need while they are younger and building their financial portfolios, and then exchange a portion of that coverage for a policy that is usable for the remainder of their life.

The exact timing of this change will depend upon the personal financial situation of each person. Some questions that should be considered for this transaction:

How does your health today compare to when you took out your term coverage? One of the best benefits of a term conversion is the ability to exchange your policy at the same health class as your original policy, regardless of your current health status.

How much coverage do you need to replace the Social Security income, pension income or other income sources that are paid only while you're alive?

How much coverage will you need for burial and other final expenses?

How much coverage will be needed to cover debts you may still have during retirement?

How much coverage will you need to pay income, estate and other taxes on the assets you have accumulated over your lifetime?

An often-overlooked benefit is the ability to convert group term policies. Group term conversions work differently from individual policies, but for people who have health conditions that would prevent them from buying individual insurance, it provides the ability to continue some coverage at reasonable rates.