If you’ve bought term life insurance, congratulations! You’ve taken an important step in protecting your loved ones from financial hardship.
When your term is nearing completion, you might start receiving letters from your insurance company touting the benefits of converting your term policy to a whole life policy. They’ll make it sound as if it’s the best thing since sliced bread with raisins.
But is that really the best decision in your situation? Here’s some information for you to consider and make a good choice for you and your family.
What are the benefits of converting a term to a whole life policy?
The chief benefit of converting a term to a whole life policy is that you can lock in a cheaper rate now. You won’t have to go through the whole extensive underwriting process again or complete a medical exam in most cases as long as it’s within a certain time frame.
Whole life policies are much more expensive than term life policies. If you couldn’t afford a whole life policy when you were younger but now you’re in a better financial spot, it can make sense to convert your term to a whole life policy.
When should you not convert your term policy to a whole life policy?
Truthfully, most people don’t actually need whole life insurance.
Insurance is designed to protect your loved ones from financial hardship after you die. By the point at which your term life policy is expiring, your spouse ideally is well on his or her way to saving up for his or her own retirement. Maybe your kids have already moved out, and you’ve paid off most or all of your high-interest debt. In that case, would anyone really be harmed financially if you pass away? If not, then it’s possible you don’t even need life insurance at all.
Still, maybe your circumstances have changed and now it does make sense to get whole life insurance. Here are some common scenarios where that might have happened:
Scenario 1: You’ve developed new health problems
It’s quite possible that you’ve developed some health conditions such as heart disease or cancer. If this is the case, you may be declined if you try to purchase a new term or whole life insurance policy.
Because you aren’t required to take another medical exam when you convert your term policy to a whole life policy, this might literally be the only way you can get life insurance anymore. Of course, if you do need continued coverage, it’s worth at least shopping around for life insurance quotes in case your health condition isn’t serious enough to warrant an automatic decline.
Scenario 2: You’ll be supporting dependents for the rest of your life
If you have younger kids, it makes sense to buy term life insurance. After all, those kids rely on your income—what would happen if you died? Most of the time your kids will move on and start their own lives sometime after they turn 18.
But what happens if you have a disabled child, or one who will depend on you for financial support for the rest of their lives? In this case, it makes sense to convert your term policy to a whole life policy to provide for your child’s needs after you pass away. In this case, you could use the proceeds from your life insurance policy to fund a trust for your child. These documents require a lot of care and knowledge to prepare, so it makes sense to work with an attorney in this case.
Scenario 3: You’ve struck it rich
You might not have been able to afford a whole life insurance policy when you were younger, but maybe you struck it big in the interim. If you have more than $5.49 million in assets as a single person, or $10.98 million as a couple, your assets will be subject to an estate tax of potentially several hundred thousand dollars (or more) before they can transfer to your beneficiaries.
Converting your term policy to a whole life insurance policy can help your beneficiaries pay for the estate taxes when you pass away. Of course, most people won’t need to worry about this — but the option is there if you need it.
Shop around for a new life insurance policy
If you do need a whole life policy, it’s likely you will get the best rate by converting your current term policy. Still, this is a policy that you’ll have for the rest of your life, so it makes sense to take a few minutes now to shop around and see whether you can’t beat the rates with a competitor.
Take a few minutes to browse whole life insurance companies. Pick a couple insurance companies with high A.M. Best ratings and call them to get a quote. Even if you save just a few dollars with each payment, that can translate into thousands of dollars over your lifetime if you pay monthly.