6 July 2012 0 Comments

Replacing Permanent Insurance With Term

I just discussed replacing Term with Term.  Now here are my thoughts on replacing Permanent with Term.  There is really only one reason to do that:  to reduce current premiums.  Term will not cost less than Permanent in the long, long haul, but for the time being it helps with current cash flow.

There are three basic reasons why you might want to do reduce your premiums:

  • You’ve decided you don’t need permanent protection.
  • You just can’t afford to keep paying your current premium.
  • You want to invest your money elsewhere.

If you really don’t need permanent insurance, then term is a better way to go.  But, how do you know today what protection you may need or want in the future?  And, at what point is term not such a good deal?  If you will need protection beyond age 65, then at some point you’ll likely move back to Permanent Insurance.  You may be able to convert your Term to Permanent but it will be at an increased premium based on your age at that time.  In short, ask yourself what caused you to buy Permanent Insurance in the first place.

If you simply need to reduce your cash flow, will a temporary fix help?  If your policy is participating whole life, perhaps you can surrender some dividends or make a policy loan and keep the Permanent Policy if that’s what is called for.  If it’s a Universal Life, you may be able to reduce premiums for a while without losing the policy.  You might also be able to reduce the policy’s death benefit, keeping some Permanent Insurance that has a reduced premium or is paid up.

Can you buy term and invest the premium difference producing a better return than cash value in a policy?  Possibly you can, but you must be a disciplined and informed investor and if there is still a need for Permanent Insurance, you may still end up converting the term at some time in the future.

The difference between a premium for permanent insurance and term is huge.  At age 40 a male in the best preferred underwriting class might pay $650 per year for a 20 year term policy and $5,000 per year for a lifetime guaranteed Universal Life policy.  That huge disparity tells you that not many in pristine health will die within the first 20 years.

Just make sure you have all the facts before dropping your Permanent Policy.  It may be the right thing for you to do, but there’s more to it than just “saving 50% or more” on your life insurance.

Next I’ll be covering the replacement of Term with Permanent.

Leave a Reply