Why term insurance is good and shouldn’t be ignored
This blog is all about Term Insurance and why it shouldn’t be ignored as it has its own benefits separate from a permanent life insurance policy
It will also explain about how you can convert it into a whole life policy down the road.
What is Term Life Insurance?
Term Life is a more affordable option that provides coverage for a set period. Common term lengths are 10 years, 20 years and until you’re age 65.
The term length usually lines up with things like 25 years on a mortgage or 20 years until the kids are grown and can be independent.
Now, why would you get this instead of whole life insurance?
Maybe you don’t have the funds currently to pay the premium for whole life as it’s significantly more expensive than term insurance.
Term costs less because it only covers you for a certain period which you can outlive, whereas whole life insurance has a guaranteed payout at the end sometime.
This can be great; you can save the difference and either use the money or invest it in a tax-sheltered account like a TFSA.
And term is useful for the time when you may need it, say when you’ve just had kids and you make more than your partner, if the worst happens then their bills are paid and the groceries, and the car, and the school and the soccer and the and the etc.
Just like whole life insurance, the death benefit for term insurance pays out quickly and tax free.
This means your family in this scenario can use the money right away for whatever needs they have.
Another great feature of term insurance is that it’s a temporary expense that only lasts for however long you decide to get it for.
Of course, there is some downside to it being only temporary, so after the term ends, and you don’t renew the insurance is gone.
You have options when the term ends. You can choose to renew it for another longer term, or you can convert it into a permanent policy like whole life.
Your renewal premiums will be higher because you’ll be older at that time in 10 years or 20 years.
But your needs could change by the end of the term and maybe you want another term or maybe you feel as though you can afford to use a permanent life policy now.
How to convert your term insurance to permanent insurance
So how do you convert your term insurance into permanent life insurance.
There is a conversion period where you can tell the insurance company that you want to change all or part of your current policy to a whole life.
The insurance company will run a quote at that time and let you know what the new premium will be for the new whole life policy.
What’s great is you can guarantee to convert your term policy without having to answer any medical questions.
You can only convert your term policy to a permanent policy during the conversion period so talk to your advisor about when that is because it will be different depending on the insurance company you’re working with. Some allow conversions in the first 5 years; some are 10 years and some you can convert anytime until the term policy expires.
Again, converting to permanent life insurance will have higher premiums because permanent insurance is more expensive than term insurance and you’ll also be older by then.
Not all term life policies have a conversion clause, but most do.
Some insurance companies don’t offer permanent insurance so you can’t convert those. We usually only work with companies where you have the option to convert later.
Why convert your insurance?
Now why might you change to a permanent life insurance policy from your term policy?
Something we talk about a lot in our videos is the cash value component inside the whole life.
This is great as you can tap into that cash value to invest or build or to supplement your retirement income in the future.
Another reason is that you may outlive your term policy and your beneficiaries won’t receive the death benefit.
The shorter the term, the more likely you will outlive the policy. If you’re 40 right now and you get a term 10, you’re statistically probably not going to die at 50.
But with a permanent life insurance policy your family is guaranteed to gain the death benefit one day even if you live to 100.
A third reason is that you may have a lifelong dependent, such as a special needs child or financially dependent parent.
This helps create more of a safety net for them.
An unfortunate reason for switching might be that you have developed some health problems and renewing your term insurance or starting a permanent policy after the term has expired may be unfeasible or may be denied.
As long as it’s within the conversion period, even if you develop any health problems, you will be able to convert your policy with no change in medical rating.
There are some alternatives to converting as well.
You can always purchase a new term policy, and though the inconvenience of more tests isn’t fun, you might save some money by going through underwriting again.
Another is the ladder strategy, which is a cost-effective way to meet your life insurance needs that change over time.
It involves purchasing multiple term life policies with different expiration dates instead of just taking out one policy for all your needs.
This takes advantage of the fact that your life insurance needs will decrease as you get older and ensures you only pay for the coverage you need.
So, Term life insurance is the more affordable option compared to permanent life insurance and provides coverage for a certain amount of time.
It might be worth it to convert to permanent life insurance policy for your needs or you could ladder them.
Whichever you feel serves you the best.
Contact Us
At Safe Pacific Financial, we specialize in helping Canadian business owners, incorporated professionals, and investors structure life insurance for maximum wealth protection, tax savings, and business growth.
If you would like to discuss whole life insurance or investments, we’re happy to chat and see if we can be a good fit to work with you. Fill out our contact form and we will get back to you within 24 hours on business days.
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