Converting To A Whole Life Policy: The Good & The Bad

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Converting To A Whole Life Policy: The Good & The Bad

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Do you have term life insurance? If so, you might consider converting it to whole life insurance. The latter provides more benefits and can help you grow your wealth.

Term life insurance is only good for a set period of time. If a policyholder died during that period, his or her heirs would receive a death benefit. If that person survived that length of time, however, the policy would simply expire. Unless the policyholder renewed it, that person's family wouldn't receive any money upon his or her death.

By contrast, unless a policyholder cancels it, a whole life insurance policy lasts an entire lifetime.

The Pros and Cons of Whole Life Insurance

The first great feature of a whole life insurance policy is the guaranteed death benefit. No matter how long you live, your beneficiaries will inherit this sum of money. Just be sure that all of those people know they're your beneficiaries. That way, they'll be able to file a claim when the time comes.

Then there's the cash value of such a policy. It's separate from the death benefit, and it keeps growing over time. The cash value makes the insurance policy an asset, one that you can use as collateral when you need a loan for a car, a home or another major purchase. However, be aware that any policy loan you take out will be subtracted from the death benefit.

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Here's another way to look at a whole life insurance policy: In essence, it's a savings account. If you don't have much disposable income right now, obtaining such a policy can be a way of forcing yourself to save money. On the other hand, if you have significant wealth, this policy can be a way of decreasing your tax liabilities by sheltering some of your cash.

When it comes to making payments, whole life insurance is flexible. You can decide how often you want to pay your premiums and for how long. Thus, like a car loan or a mortgage, you might be able to pay off all of your premiums when you're still relatively young. Once you're done paying, your whole life insurance policy will continue growing in value for the rest of your life.

As a bonus, when you sign up for this type of policy, your premiums are fixed from the start. Therefore, if you obtain one when you're young and healthy, you can enjoy lower premiums forever.

In addition, maybe someday you'll need to get money fast. If you're ever in such dire straits, you could cancel your whole life insurance and receive the cash value of your policy outright.

By comparison, term life insurance is not an asset, and it has no cash value. Once your term expires, all of the money you paid in premiums is lost.

As is true of just about anything, whole life insurance has a couple of drawbacks. For one thing, its premiums are considerably more expensive than term life insurance premiums. And, though it's a steady and reliable asset, it'll probably give you a lower return than many other kinds of investments.

How to Switch Over

If whole life insurance sounds better to you than term life insurance, you might be wondering: How do I make the change?

Your term life policy likely contains a conversion rider. All you have to do, then, is contact your life insurance company and ask to convert to a whole life policy. The company will supply you with the paperwork you'll need. This process, by the way, is free of charge.

Be aware that your term life policy might contain some conversion restrictions. For instance, you might be allowed to convert only after you've had this policy for two or more years. On top of that, your conversion eligibility may end when you reach a certain age.

When you convert, you may have to go through the underwriting process again. Underwriting is when an insurance company evaluates a potential customer's level of risk. When you're applying for life insurance, underwriting often involves a medical exam.

You're more likely to require a new underwriting if your medical condition has changed, if you're seeking larger benefits or extra riders, or if you were never thoroughly underwritten in the first place.

What's more, you may be able to choose a partial conversion. For example, imagine that your term life policy has a $1 million death benefit. You could convert just a portion of that amount to your whole life policy: $600,000, for instance. The remaining $400,000 would simply disappear. Consequently, you'd have lower whole life premiums to pay.

Conclusion

On balance, whole life insurance is a very favorable choice for many people. Yes, the terms, conditions and options that come with this type of insurance can be complicated and confusing. You might want the assistance of a qualified financial professional to sort all of it out. In any event, once you have your whole life policy, you can start to enjoy the increased wealth and the plain old reassurance that will come with it.

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