Despite the fact that many financial advisors consider whole life insurance to be an important long-term planning tool than term life insurance, many consumers still opt to purchase term life policies.
Term life insurance is often sold at a lower price compared to permanent life insurance products. Other times, a consumer sees a term life insurance policy as one way to satisfy an immediate coverage need. Some of the common expenditures that consumers may envision the pay out from a term life insurance policy covering include:
College or graduate school tuition
Devotees of the media personality Dave Ramsey may also hold term life policies as one pillar of the author and talk show host’s personal finance plan, which includes advising consumers to buy term life policies because they’re cheaper than whole life policies, then use the difference to invest in the stock market.
However, only about 2 percent of term life insurance policies actually pay out, according to Forbes magazine contributor Tim Maurer.
Converting a term life insurance policy to a permanent life insurance policy should always be a back-pocket option for most consumers. Advisors who talk with clients about this option will gain the benefit of that person’s trust in addition to the potential for fresh business, given that the original policy does indeed include a conversion clause. (Not all do.)
It also behooves financial professionals to seek clarity with clients whenever those consumers seem ‘fuzzy’ about the conversation requirements of their term life insurance policies — including any relevant deadlines.
Since buying a new whole life policy will be more costly than the investor’s old term life policy, the first thing that an investor should understand is the lasting value of permanent life insurance.
Read on for six reasons why consumers with term life insurance policies should consider converting those policies, despite the higher premiums associated with whole life products.
They’re likely to outlive their term life insurance.
No one is happy with an investment that results in zero gains. The No. 1 reason that consumers who seem very likely to live beyond the term of their standard life insurance policies should look into conversion options is, if they don’t, they risk losing their premiums once that policy has expired.
(AP Photo/Nick Ut)
They are rethinking their estate.
Term life insurance policies are generally not seen as effective for estate-planning. Whole life insurance policies, on the other hand, carry more value and security.
Also, wealthy consumers who are concerned about estate taxes that may be incurred by beneficiaries after they die may consider whole life insurance policies because of the payout of those policies can be used for just such an expense.
They may simply prefer an upgrade.
Term life insurance policies are often sold to young families with competing financial priorities such as paying down debt or socking away money in a college fund. These customers might have preferred the long-term security of a whole life insurance policy, but simply couldn’t afford it and instead decided to buy a term life policy.
As these consumers become more financially secure, and they are more willing to pay higher life insurance premiums for increased financial security and peace of mind.
They anticipate steep family costs.
Consumers who anticipate that their families will face major financial hurdles after they are gone, such as the expense of caring for a developmentally disabled adult, may want to turn to a whole life insurance policy in order to ensure that those beneficiaries are adequately covered.
They are restructuring their retirement income.
Consumers who can see retirement on the horizon and want to ensure sufficient income throughout old age may want to consider how a whole life insurance policy, the principal of which is tax exempt, can serve as a savings tool. Investing in one can equate to a certain amount of tax-free retirement income down the road.
Some consumers may even want to consider investing in a tax-sheltered permanent life insurance policy now with the anticipation of cashing it out later for retirement income.
Their financial priorities are changing.
Since the chances are high that individual investors were younger and healthier when they purchased their term life insurance policies. Some of those people may have subsequently developed very serious illnesses that could prevent them from qualifying to purchase permanent life insurance policies in the future. People in this boat may want to convert a term life insurance policy in order to forgo the anticipated medical exam that would be required to purchase a completely new whole life insurance policy.
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