Moving From Term Life Insurance to Whole Life

Blong protection — but when is the right time to convert a term life policy into a whole life one?

For example, take Alex and Jill, a young working couple in their early 30s who recently purchased their first home with a 30-year mortgage.

While the two have modest salaries, they want protection for the family they hope to grow in the coming years.

Having spent a significant amount of their savings on a down payment, they are seeking a more affordable life insurance option while they work to build their savings back up as they simultaneously pay down their mortgage.

They decide a term life policy is the way to go and purchase a 30-year, $300,000 policy to match the length of the mortgage.

This way, "if something happens," the family will be protected.

Term vs. Whole Life Insurance

Term life insurance provides coverage for a set window of time, generally 10, 20 or 30 years.

The policy offers a death benefit for beneficiaries (such as a spouse and dependents) if the policyholder passes away during the term window.

Term life premiums are generally more affordable and can be as low as $20 a month, making them a good option for younger people facing temporary financial obligations.

As the name implies, whole life insurance provides coverage throughout the entirety of the policyholder's life, as long as the premiums are paid.

These types of policies also include a cash value component that grows over time, which can serve as another source of savings to be borrowed against or withdrawn.

Whole life insurance is a better tool for estate planning, providing a legacy for future generations and final arrangements.

When to Switch

For Alex and Jill, 25 years have passed, and they are now in their early 50s.

Alex and Jill have had two children, Mark and Jack, who are now 22 and 24. Both children have graduated from college and are no longer financially dependent on their parents.

Alex and Jill are in good health, and they're making more money than they did when they were in their early 30s. They have a dwindling mortgage, and they have built up their savings again.

Life insurance may no longer be a necessity to protect immediate expenses. Alex and Jill are no longer in an "if something happens" phase of life.

But Alex and Jill want to ensure that their family is provided for as they age and after they are gone.

The two have also had conversations about estate planning with their own parents.

They want to set Mark and Jack up for success in the future.

This could be the right moment for Alex and Jill to convert all or a portion of their term life policy into whole life coverage, even though the whole life coverage may cost more per dollar of coverage, for a number of reasons:

◆ With fewer financial obligations, the amount of coverage they need has decreased.

◆ The transition from term life to whole life provides the opportunity to lock in a premium rate for life.

◆ Alex and Jill are still in good health, meaning that they can lock in the lowest rate.

◆ Their term policy is still in place, meaning that the transition to a new policy will be smoother and likely not require new medical underwriting

How to Switch

The transition of a term life policy into a whole life policy can often be quite seamless when done at the right time.

Most term life policies allow policyholders to convert to a whole life policy without new medical underwriting during a set conversion window.

Further, many people convert just a portion of their existing term life policy into a whole life policy.

Alex and Jill have built their savings back up, meaning that they are looking for a smaller policy, and they have the ability to take on a larger premium.

By working closely with a financial professional, the two decide to convert their $300,000 term life policy into a $100,000 whole life policy.

Protected for Life

Thoughtful financial planning means Alex, Jill and their family are set up for success for the long term, no matter what life throws their way.

The extra layer of financial security and flexibility put into place by Alex and Jill's life insurance plan means that Mark and Jack have one less thing to worry about in the future.

While requiring a bit of foresight, life insurance has been a key lever for the family to plan for the future and reach their personal and financial goals.

Abbie Rodriguez is senior vice president for the individual segment at TruStage.