Permanent life insurance policies are intended to provide coverage for as long as you need it, while term life insurance policies are only valid for a specific period of time. While permanent life insurance plans provide more coverage, they also have much more expensive monthly premiums. If you are on a budget and you are getting older, you may be wondering if you can convert your permanent life insurance policy to a term policy, which would give you approximately the same coverage at a much cheaper price.
Difference Between Permanent and Term Life Insurance
Before you try to convert your permanent life insurance to term life insurance, you need to understand the differences between the two. Term life insurance is the most affordable type of life insurance, and it only lasts for a specific period of time, usually 10 to 20 years, but it can be longer or shorter. The idea is that you purchase it later in life and renew if you end up living for a very long time.
On the other hand, permanent life insurance policies do not expire and do not need to be renewed. This is sometimes referred to as whole life insurance or universal life insurance. Both types of policies usually give you the option to save money as part of the policy’s cash value. Whole life insurance means that your savings grow at a much more structured rate with little risk involved, while with universal life insurance, your cash value is invested and can grow or lose money based on the market’s performance. Regardless of which type of policy you choose, they are both going to be more expensive than term life insurance.
How To Convert Permanent to Term
Unfortunately, converting your permanent life insurance to term life insurance isn’t the easiest thing to do. While many companies provide the option to up your coverage from term life to whole life, they tend to discourage lowering your coverage. Before you do anything, it’s important to talk to an insurance agent to learn more about your options, and then read through your current policy thoroughly. There could be consequences to breaking your current contract.
If you have cash value built up in your permanent life insurance policy, you may be able to use this to convert your policy into a term plan. This is usually referred to as an ‘extended term’ option in your contract. Essentially, it will take the amount that you have built up and use it to pay the premiums on your life insurance, but only for a limited period of time. If this time period is long enough for your needs, then this is going to be the easiest solution.
If your main goal is to get rid of expensive premiums, you can look at ‘reduced paid-up’ options. This will essentially convert your cash value into one giant premium, and you will never owe another premium on the policy. It will stay as a whole life policy, so you don’t have to worry about it expiring. However, the downside is that your death benefit will go down drastically.
For both of these options to work, you need a significant amount of cash value built up in your life insurance policy already. The cash value will essentially replace the cost of the premiums, so you don’t have to worry about those monthly payments anymore. There are a few situations in which this might be a worthwhile change. Sometimes our financial responsibilities change as we get older, so we need less financial coverage. For example, maybe your kids have grown up and gone to college already, so you no longer need money on the policy to support them. Or maybe you were planning on using the policy to pay off your debts in your absence, but you got a raise and were able to pay them off faster than anticipated.
However, if you don’t have cash value saved up in the policy, it’s going to be very difficult to convert your permanent life insurance to term life insurance while remaining on the same policy. Instead, you should consider lowering the death benefit on your existing policy, which you can typically do at any time. This will help make your premiums lower and is much easier than trying to convert one policy type to the other.
Do Your Homework Before Buying Life Insurance!
Before purchasing your life insurance policy, it’s important to take the time to fully understand the benefits and downsides to each of these policy types. This will prevent you from being in a situation where you want to change policies later on. When making your decision, it’s important to think not only about your current financial situation but also what your financial situation will likely be later on in life. It may help to talk to an insurance agent before making a purchase so they can walk you through the options that make the most sense for your family.