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Life insurance options: term to perm

Term to perm

When looking around the market for life cover, the first thing you notice is how much cheaper it is to insure your life with a term policy. When you are young, it can look a good option to buy term. The alternative of a permanent policy is going to take a bigger slice of your disposable income. You are not sure it’s worth the pain. This may well look the right decision but, when you take the longer view, what starts out a struggle to afford becomes increasingly affordable as inflation takes effect. But if you buy one term policy after another, the premium rate rises each time. Equally if you look to switch to a permanent policy, you are that much older and, again, the premium rates on a new policy will be higher.

A good compromise can therefore be to buy a term policy with the right to convert to a permanent policy. Why should you seriously consider paying a little more for this right? The first part of the answer comes in the total loss of all the premium installments you have paid. Once a term policy lapses because you stop paying or the term expires, there are no refunds. All the money you paid is gone. But if you convert to a permanent policy, you retain the value of the installments paid. The second part comes with the fact this is a right. Should your health suffer after you take out a term policy, that new health problem means you will probably be refused a second policy or the premium rate will be high. If you have a right to convert, this is not a new policy so none of the rules about pre-existing conditions affect you.

Moving to your senior years, being able to convert a term to a permanent policy avoids loss of value if the policy may soon expire. It may also give you an asset you can sell on the life settlement market, i.e. you convert a non-performing asset into immediate cash. This option suddenly became valuable during the recent crash in the value of investments. With borrowing next to impossible and little to sell to raise funds, this became a lifeline. Except many seniors did not realize they had this option. If you hold a cheap life insurance policy, i.e. one with a low premium rate, but a minimum guaranteed payment of $500,000, you should talk to an expert about your rights. The older you are, the more essential it is to have this discussion. Some of the buyers on the life settlement market prefer the conversion to be made a reasonable time before expiration, i.e. the rules penalize you if you delay until the policy has almost run out. Some policies place a limit on the right to convert, e.g. no conversion is allowed after your 75th birthday. This may sound a little complicated but, rather than risk your existing term life insurance cover lapse or expire, you should always take advice to ensure you are protected during your golden years. This should be a time when you can relax and take life easy. The cash that can come from a life settlement sale can give you that comfort and security.

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