When you buy life insurance or are evaluating what you have, it is important to check on the conversion options. Most company’s offer a least one option to convert their term products to permanent life insurance. What is great about the ability to convert is that it requires no additional underwriting or approval from the insurance company. Life circumstances change and people’s needs change, so it is a door that you want to leave open. Many of the clients want to buy term and feel that is all they ever want. That may be the case now, but you never know where you will be in 15 years.
The main options that you can convert to typically are universal life insurance, variable universal life insurance, and whole life insurance. Each one has benefits, but not all policy’s are created equal.
Option 1- Universal life- is a type of permanent insurance that has the most flexibility. There is flexible range that can be premium amount that can be paid into the policy. If there is enough cash value to cover the cost of insurance in the policy than premiums can be drawn from the cash value. Payments into the policy above the premium are credited to the cash value and the cash value will be credited with interest (usually using an interest rate index). The interest rate varies based upon the insurance company.
Option 2-Variable universal life- is similar to regular universal life with its flexibility. The difference is that the amount above the premium is put into a separate account that is invested in the stock market. This has more upside and downside risk for the cash value with the money being invested in the stock market.
Option 3-Whole life insurance is the most traditional form of permanent life insurance. It has a set premium that will never increase but it isn’t flexible and will last forever s long as the premium is paid. Whole life has a guaranteed cash value and the policy’s can actually do better than the guarantee. If the company declares a dividend than that is credited to the cash value as well, but dividends are not usually guaranteed.
It is important make sure your policy has at least one of the conversion options above.