Keeping an inexpensive term life insurance policy for too long can cost unprepared families lots of money in the long run.
While
term insurance is a great way to protect your family from financial
disaster, sitting on the same policy until it is too late to replace it
with a permanent options can be a financial disaster.
Term life
is temporary insurance. It pays a fixed death benefit if the policy
holder passes away during a set period of time. For example, if you
have a 20-year term policy and you die before the 20 years end, your
beneficiaries will receive the face value of your policy.
Once
the 20 years is up, the contract expires. The company keeps your
premiums and you have to find new insurance, usually at a higher
premium. Term insurance helps you to prepare for the unexpected.
Term
insurance is the cheapest form of life insurance because it is
temporary and not intended to pay out. Young families benefit from term
insurance. In many cases, it is taken out to help support young
children and a spouse in case the primary breadwinner passes away. That
takes a large policy to accomplish.
Many young adults do not have
substantial savings and investments yet. They have a lot of their money
tied up in new mortgages and student loans. Term policies offer a
cost-efficient solution.
But as families mature, the breadwinners
grow older and the policies get closer to expiration. Situations change
and families need to consider changing their term insurance into a more
permanent option.
Many term insurance contracts have a clause that allows the policy holder to do just that.
You
could think of it as leasing insurance with an option to buy. You can
use the convertibility clause to convert without having to obtain a new
insurance policy. For a price, families can transform their temporary
insurance into permanent insurance without having to re-apply for
coverage or have medical examinations.
Not all policies have
conversion clauses. If you are buying term insurance, look for policies
that include the clause. They are often more expensive, but well worth
it.
For example, you have a 20-year term policy with a 10-year
conversion clause. After nine years, you develop a major health
problem. You are still within the 10-year conversion period, so you can
convert the policy to a permanent policy. By doing so, you will not
need a new physical exam and you will receive your coverage at a much
lower rate than if your health problems were taken into account.
If
the policy didn?t have the conversion clause, you would be facing an
expiring policy and very expensive renewal premiums ? if you could
renew at all. You should always convert before it is too late.
You
should review your policy with your agent on a regular basis. This will
help to prevent that your conversion expiration doesn?t sneak up on
you. When you are within a year of convertibility, you should take the
time to look at your plan. Consider your health, finances,
responsibilities and goals.
Don?t just look at your health in
considering whether or not to convert a policy. The older you are, the
more expensive you are to insure. By locking in a fixed rate and paying
toward a permanent policy in your 20s, your monthly premiums will be
much cheaper than if you had waited until your 50s.
Your
financial needs transform over time. Your family matures and changes.
When you are young, you often need a policy to replace your income and
provide for your children. When you are older and your children are
grown and your mortgage is paid off, you may find that you don?t need
such a large policy.
The roughest rule of thumb is to take a
multiple of your income. If you only need enough insurance to take care
of your family for a few years after you die and set them up until they
can get on their feet, buy 4-6 times your annual salary. If you want to
take care of them for the rest of their lives, you can look at
something quite larger, like 20 times your salary. That gives enough to
establish a trust that they can life off of indefinitely.
One
strategy involves buying the largest term policy you can afford when
you are young. When you can afford more, supplement your term policy
with a small permanent policy.
When your term insurance is set to
expire, your children will be grown and your mortgage paid off. Then
you can look at what coverage you will need.
Martin Lukac, represents http://www.RateEmpire.com and http://www.1AmericanFinancial.com,
a finance web-company specializing in real estate/mortgage market. We
specialize in daily updates, rate predictions, mortgage rates and more.
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