Term Life Insurance – Converting Term to Permanent.

Most Individual Term Life insurance Plans contain a contractual right to exchange the Term coverage for permanent lifelong coverage without having to requalify medically or financially. Here is how it works.

Sections

1. Life Insurance 101

2. Term Insurance

3. Permanent Insurance

4. Conversion Option - What is it!

a. Valuable contractual right to exchange term for perm.

b. Ability to exchange all or part of term for permanent without having to qualify.

5. Why is permanent life insurance valuable?

6. Why use it!

7. Why you need the permanent!

8. What are the cost of delaying in purchasing permanent?

9. Why Now!

10. How to do it!

To fully appreciate the value of the conversion privilege in term life insurance policies, a little insurance primer is in order.

TOP

Life insurance 101

• Life insurance is a contract between you, the purchaser (insured) and the insurance company (insurer) to provide for a consideration (a stipulated premium payments from the insured) to pay a  large sum of money (Sum Insured) if death of the person insured (life insured) occurs while the policy is in effect (in force).
• Life insurance is an asset just like any other asset. You own it, you control it. It has a value. You can use it for collateral. If you transfer the ownership to someone else; it may have tax implications.

The Bad News:

1. Insurance contract are a take it or leave it proposition. Life Insurance contracts are generally considered contracts of adhesion because the insurer draws up the terms and wording of the contract and the insured [you] have little or no ability to make material changes to it. Legally, this is interpreted to mean that the insurer bears the burden if there is any ambiguity in any wording or terms of the contract. Insurance policies are sold without the policyholder even seeing a copy of the contract ahead of time.The Good news about the bad news is that, you know upfront what the bad news is. You usually have 10 days after it is delivered to you, to review the wording of the life insurance contract; but your only option is to reject it outright; no negotiations.

The Good News:

1. Ordinary non-insurance contracts are commutative in that the amounts (or values) exchanged are usually intended by the parties to be roughly equal. By contrast, insurance contracts are aleatory in that the amounts exchanged by the insured [you] and insurer are unequal and depend upon uncertain future events. e.g. You pay a small amount, and if the event insured [your death] happens the insurance company pay off a BIG amount to your beneficiary.
2. Life insurance contracts are unilateral, meaning that only the insurer makes legally enforceable promises in the contract. The insured is not required to pay the premiums, but the insurer is required to pay the benefits under the contract if the insured has paid the premiums and met certain other basic provisions. As long as you told the truth to questions asked when applying, and you paid the stipulated premiums when due, the insurer cannot take the contract away.

The upshot is that the bad news is a known quantity and you know it upfront, on the otherhand, the good news [the benefit] is HUGE.

TOP

Term Life Insurance

Term life insurance is protection for a specified period of time to age 65, 70, 75, 80 or age 85. The cost or premium of the protection can be laddered and may go up after specified periods, like every 5,10,15 or 20 years. But you control how long you keep the protection by paying the required premiums. Unlike many other contracts, there is no penalty for stopping the contract early. [except the loss of protection].

Many people purchase term life insurance out of immediate necessity and because it is relatively inexpensive in the early years. Some of the typical uses of term life insurance are illustrated in the table below.

The typical configuration of term Life insurance is as follows:

• Coverage goes to age 70,75,80 or 85 depending on the plan.
• The cost of coverage is “laddered” and step up after a specified time periods, getting progressively more expensive with each step, and the increments get progressively steeper.

Sample rates*:   $250,000 Male Non smoker age 35 at issue for Term to age 85 [annual cost] June 2010

* All rates are renewals except age 35 Rates change constantly and the actual rate is irrelevant. It’s the correlation between rates is the important element.

** Term 100 the premium stops at 100 but the coverage continues for life.

~ Starting Rates if you purchased a new T100 at specified age, and remains level going forward.

Most “individual” term life plans have an automatic Conversion Privilege.

TOP

Permanent Life Insurance.

Insurance the protects against not only premature death but also death regardless when it happens. In other words, protection for LIFE.

If you ever paid taxes, borrowed money, accumulated savings, but haven’t spent your last dime, prepaid all future tax liabilities, prepaid your funeral expenses, have surviving loved ones, care about any charity and don’t consider government as a charity; you probably need permanent life insurance.

The bottom line is virtually everyone needs some amount of permanent life insurance. Once you accepts that premise, then the only decision that need consideration is how much, which type and when to initiate the purchase.

Again, given the fact that most should have permanent life insurance, many never buy it. Having been in the business for over 40 years I have been able to identify the commonest factors that lead the rationalizations people go through against buying permanent life insurance.

1. Those that buy life insurance for the first time buy term insurance; cheaper and you can buy more of it for the same amount of cash outlay.

2. Some, based on cultural upbringing, don’t believe in life insurance, so if they do buy, its under duress, either by the bank, a business transaction, a pesky spouse, or persistent insurance agent.

3. Many who have term life insurance believe their need for life insurance is temporary; no more than 20 years, and thus no need for the expensive permanent life insurance.

4. Others, see or are shown the light, and are willing to make the permanent life insurance purchase later in life, (50+), but find the price too steep, for the needed amount; or their health or some other factors prevent them from making a purchase.

It’s like a little insurance policy inside your term life insurance policy. It’s a guaranteed benefit up to a certain age that allows the policy owner to exchange the term policy for a permanent policy, regardless of the health, or other insurability factors of the life insured under the policy.

Think about it for a second, this benefit is in your policy, up front, where the insurance company gives you an unconditional extension in the length of the coverage that makes it certain that a death benefit payment will take place regardless of when it occurs. The insurer also makes a further guarantee. The cost of the new permanent policy is the same price as everyone else has to pay, who has to pre-qualify at the age you exercise your Conversion Option. furthermore, the rate will never change regardless how long you live or how your health deteriorates with time. This right, privilege and benefit exist in your term life insurance policy. The price of the new converted policy is based on the category you were when you bought the term policy at your current attained age.

If you accept the true value of this privilege and wish to act upon it, you should do so with the benefit of competent advice and an advisor you can help you select the appropriate permanent plan. If you have an active advisor you can call, do so, otherwise we are here to help you. ~

CONTACT...

TOP