In general, there are two types of life insurance coverage:
- Term life insurance
- Permanent life insurance
As the names suggest, term life insurance covers only a specific amount of time, while permanent life insurance offers lifetime coverage. Term life insurance can be a valuable planning tool to assure that you get the amount of coverage you need for a specific length of time at a premium that fits your budget. Please understand though, when the term is over you either must to try to find new coverage, pay incredibly high rates, or convert to permanent coverage if your policy allows.
The conversion option on term life insurance can be critically important. Some policies allow you to convert to permanent coverage only in the first five years while others will let you convert up until the end of the term period or until you have reached a certain age. Why is this important? Under the conversion option, you can move all or part of your coverage to a new policy without having to qualify medically or otherwise. That means there are no physical, medical, or financial questions in order to qualify for the new policy. The insurance company is contractually obligated to allow conversion to permanent coverage under the terms of the policy.
Let’s say you are in the last year of a ten-year term policy and you have just survived cancer. Your policy is renewing and your annual premiums are going from $600 per year to a rate of $3500 per year and increasing each year after that. Cancer survivors generally have to wait six to eight years before an insurance company will consider insuring them on a new policy. If you have a company that allows you to convert to any of their permanent policies, you may be able to convert to a plan that is around $1800 per year if they offer a competitive permanent policy. That’s why it is important to know what the conversion options are and what the company practices are regarding which policies they allow you to convert to. Some companies only allow conversion to their most expensive permanent plans while others are more liberal with this practice.
It would be a good idea to ask the agent selling the policy what the conversion options are and how competitive that particular company’s permanent policies are compared to others. It may be better for you to pay a few extra dollars per month with a company that has better conversion policies available on their term insurance versus one that has limited conversion options.
There are several options for term life insurance these days. The most popular term policies are ten, fifteen, and twenty-year plans. There are also several companies that now offer twenty-five and thirty-year terms. The longer period you choose, the higher the premium. The reason term insurance is cheaper than permanent coverage is because the insurance companies know there is a much smaller chance that they will have to pay a claim. The longer the period, the more likely you are to keep a policy, thus increasing the risk to the insurance company. Some people have the misconception that term insurance is not profitable and that insurance companies don’t like selling it. This could not be further from the truth! Term insurance is extremely profitable because so few die during the term of the policy. The average lifespan of a male in the United States is almost 80. You would be hard pressed to find a term policy that covers you well into your eighties and yes, many people in their eighties still want life insurance.