Converting term to whole life: Can you sell part of your Life Insurance?
Insurance is complicated. The wording of the policies is convoluted. Taking out a policy means you are admitting that something bad could happen. None of this is pleasant. But it is necessary. Being prepared allows you to live with fewer worries and concerns. This is especially true for life insurance. It is for this reason that making sure you have the right policy for your current situation is essential. This is why many individuals with term life insurance choose to take a deeper look at their policy and see if, a few years into holding that policy, if it is still the right fit for them. Quite a few policyholders make the decision of converting term to whole life insurance.
What Is Term Life Insurance?
When people speak about life insurance, they do so generally. Sometimes this can give off the impression that there is really only one type of life insurance. This is far from true. There is whole life insurance, variable universal life insurance, universal life insurance, cash value life insurance, term life insurance, and a number of others. While each of these has their advantages and disadvantages and the ideal type depends on the individual, term life insurance tends to be a popular option.
The main defining characteristic of this life insurance type is that it has a limited coverage period. Term life insurance is best compared to permanent life insurance, which is protection for the entire life. With term, policy owners can either let their coverage end or renew it when the term ends. There is also the possibility of converting term life to whole life insurance.
One of the major tenets of term life insurance is that it does not have a cash value. It does not have this value because there is no savings aspect to it, which permanent life insurance has. If death occurs, the only return is the amount of insurance purchased. It is because of this, and the fact that most term life insurance policies rarely need to be paid out, that term life insurance is the least expensive type to purchase. For example, for a $250,000 term life insurance policy, a policy owner would pay roughly $30 every month. An equivalent whole life insurance policy could cost a hundred times that.
Within the term life insurance type, there are three different categories.
- The first is a decreasing term. This category’s insured pays a fixed premium for the whole term but death benefit decreases every year.
- The second is a yearly renewable term. This policy’s premiums increase each year, there is no specified term, and no evidence of insurability is required to renew it each year.
- The third category is level term. The premium payments in this category are also fixed and the term can be for any specified period of time.
Because this type of insurance is both the least complicated and the least expensive, it has become the most popular form of life insurance. It is also popular amongst young people who are starting families, as they will only need to replace the primary earner’s income for a few decades. However, when the policy holder’s children are no longer dependent and assets have been accumulated, many individuals look at converting term to whole life.
What Is A Term Conversion?
As previously stated, many young people opt to get term life insurance. It is affordable and it often fits the desired needs of young professionals. Sometimes, though, circumstances and needs change. Term life insurance may have been ideal for several years but it is no longer sufficient. Insurance companies understand this and will include an option to convert in the policy. This option allows policyholders to switch to permanent, whole, or universal life insurance.
But a term conversion does not necessarily have to mean converting the entire policy. A partial term conversion is also sometimes available. In essence, this splits a policy into two separate policies, a term life insurance policy and a permanent life insurance policy. Generally speaking, the main requirement for this option is that the term’s policy meets the new plan’s minimum amount.
Policyholders might choose to do a partial conversion if they do not need the full amount converted or if they can not afford the full conversion’s premiums. The other portion of the term policy can then be converted at a later date, as long as it is before the conversion expiration date. At this point, the policyholder would switch from a term policy and a permanent policy to two permanent policies.
Why People Convert?
Converting from a term policy to a permanent policy is a popular occurrence, but it is not popular for any singular reason. Sometimes it has to do with money. Other times it has to do with health.
When it comes to health, many individuals see a big advantage in converting rather than waiting for their current term to end. The reason for this is that a health issue may only come up later into the term, but before the conversion deadline expires. Maybe it is diabetes or cancer or high blood pressure. Regardless of whatever new ailment a policyholder has, they are allowed to convert without getting a medical exam, enabling them to pay much more affordable premiums than a new permanent policy would require. The same is true of occupation change. If the policyholder changes to a more dangerous occupation, they are still allowed to convert and pay lower premiums.
Another lucrative reason to convert is reduced premiums during the new permanent life insurance policy’s first year. This is subject to the terms of the insurance policy and is not always available. Many insurance agencies, though, allow term policyholders to get this advantage if they convert during the first few years of their term policy coverage.
There is also the simple fact that permanent life insurance policies offer more benefits than term policies, such as loved ones will being protected for the policy holder’s entire lifetime and premiums remaining the same. This could be especially important for policyholders who know they will have a lifelong dependent (i.e. child with special needs). Other individuals see an advantage in converting in that permanent policies build cash value. This value can be either borrowed or withdrawn during the policy holder’s lifetime.
A final reason for conversion is the accumulation of money and property. While a policy holder’s children may no longer be dependents and might not need the life insurance money, if the individual has been successful, their estate taxes could be hefty. Money from the insurance could go towards paying this.
Selling The Unconverted Portion Of Term Life Insurance
As previously mentioned, if you decide converting term life to whole life is the right choice for you, you do not have to convert your entire policy. You may decide that you want to keep part of your term policy and convert some of it to a permanent policy, leaving you with two policies. Alternately, if you do not need or do not want two policies, you can sell a portion of your term life insurance that you do not convert. This option is not uncommon and there are multiple reasons that individuals decide to go this route.
- Many policyholders do want to hold on to some of their coverage, however, their premiums are too costly. Selling a portion of the policy allows them to reduce their payments while holding onto some of the benefits.
- Other individuals are simply worried about their retirement funds. By selling some of the policy, they are able to increase their savings and supplement income from retirement.
- Then there are policyholders who have high long-term care and medical expenses. If they sell part of the policy, those immediate needs can be met.
- Alternately, some individual’s circumstances change and ease up. They no longer need as much financial protection and so reducing the size of the policy just makes sense.
- There are also individuals who purchased policies for business continuity reasons or estate planning, but the combination of not needing the policy for these reasons anymore as well as the rising premium payments make the current policy redundant.
For any of these reasons, selling the unconverted portion of the term life insurance is a smart option.
Before you are able to get the cash for a portion of your policy, you first have to determine if you are eligible. Figuring out your eligibility can be confusing, which is why it is often best to team up with a life settlement broker. Opting for a broker will also enable you to find a buyer that will pay the best price for the policy. In short, though, eligibility is determined by a combination of two factors. First, the variables in your life insurance policy. Second, your life expectancy.
While the variables change from policy to policy, the regulations around life expectancy are generally the same. If you are likely to live more than another 15 years, it is unlikely that you will be able to sell a portion of your policy. Considerations are based on age, terminal illnesses, and major and chronic health issues. Those who are older than 80 years of age are highly likely to get an offer.
For more information on converting or selling a portion of your policy, please contact us.