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Converting Your Life Insurance: When Does it Make Financial Sense?
August 17, 2016
You have a term life insurance. Should you make it permanent insurance?
When you bought term life insurance, it made perfect sense. You wanted to help ensure that if you died while you were still working, your family would be taken care of.
Term life contracts expire after a set time period, the term. Perhaps that age is now close at hand and you're wondering if there's another option for protecting your loved ones.
You've probably heard of forms of permanent insurance such as whole life, universal life or variable life. Perhaps you've heard of it because you've been reminded your insurance contract has a conversion feature.
Some term insurance contracts have this feature. It allows you to convert your term contract into permanent insurance. And unlike term life, permanent life insurance lasts for your lifetime.
So should you convert? There's no one-size-fits-all answer.
3 factors to think through
1. Permanent insurance can potentially build up cash value.
One advantage of permanent insurance is its ability to build cash value that you can tap as needed.1 Permanent life could help your family cover estate taxes and funeral expenses. It also makes sense if you have to cover ongoing expenses, such as those of a child with special needs.
2. You may outlive your term life insurance.
According to the U.S. Census Bureau, life expectancy has been on a steady rise over the past several decades. With that in mind, permanent insurance can be an effective way to help supplement your retirement income and cover long-term financial concerns, such as a spouse's illness. In that case, conversion could keep you from passing on massive expenses when you pass on.
3. Converting to whole life may not require a medical exam.
Say your health is declining and you're still covered by a term contract. A degenerative disease, for instance, could make it impossible for you to renew when the term is up. Conversion might not require you to undergo a medical exam. (Be aware, however: You'll likely have to convert before a specific deadline to qualify for this exemption.)
Here's something else to consider: Many term life contracts allow you to convert just a portion of your contract. The result is "blended" insurance that combines whole and term.
Converting is an important decision. You need to evaluate your life circumstances and those of your loved ones before you decide if and when to convert.
In any case, reviewing your life insurance contract regularly makes excellent sense. As your life changes, it could pay to change your life insurance with it.
Questions about conversion? A Thrivent Financial representative can help you answer them.
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Life insurance proceeds may be subject to federal and state estate and inheritance taxes.
Insurance products issued or offered by Thrivent Financial, the marketing name for Thrivent Financial for Lutherans, Appleton, WI. Not all products are available in all states. Securities and investment advisory services are offered through Thrivent Investment Management Inc., 625 Fourth Ave. S., Minneapolis, MN 55415, a FINRA and SIPC member and a wholly owned subsidiary of Thrivent. Thrivent Financial representatives are registered representatives of Thrivent Investment Management Inc. They are also licensed insurance agents/producers of Thrivent.
Loans and surrenders will decrease the death proceeds and the cash surrender value available to pay insurance costs. With partial surrenders, you generally will not have a taxable event until the accumulated value received exceeds the total amount of premiums paid. Surrenders may generate an income tax liability and may be subject to a decrease charge. A significant taxable event can occur if a contract terminates with outstanding debt. Contact your tax advisor for further details. Loans and surrenders may cause a contract to lapse or terminate without value. Loaned values may accumulate at a lower rate than unloaned values. Contractual charges may apply.