Convert Term Insurance
The term Insurance can be defined as a powerful tool to protect the economic value of a human life with regards to those who may be financially dependent upon it; the inclusion of insurance policy in one’s financial plans helps him to avoid future complications. Life insurance can be divided into two parts, term insurance and permanent insurance.
Term Insurance
Term insurance can be defined as a policy which provides protection only for a specified period of time, this type of policy is meant to cover a person’s short term requirements, for example if a policy holder meets with an accident he can claim the insured amount. Term insurance policy also compensates the bereaved in the case of death of a family member. Term insurance is only a death benefit plan and does not offer any cash value. Term insurance policy coverage is for a limited period and at the end of the period the protection ceases unless the policy is renewed. A common policy period would be one year, five years, ten years or until the insured reaches the age of sixty five or seventy and if the insured survives beyond, the coverage ceases unless it is renewed. The greatest advantage of a term insurance is the relatively low initial premium cost in comparison to a permanent policy.
Permanent Insurance
A permanent insurance can be defined as a policy where the purchaser of the policy is insured for the whole of his life. Permanent insurance policy never gets terminated as long as the premiums are paid regularly and this policy builds cash value. The premiums are generally high for a permanent insurance policy as it contains good saving element, the premium in a permanent policy never changes and remains the same. There are different types of permanent insurance policies such as Whole life, Universal life and Variable life. As long as the premiums are duly paid protection is guaranteed for the entire life. The premium cost of the policy is made flexible to meet the financial need of the policy purchaser. Further the policy accumulates a good cash value,
Whole Life Insurance - This policy provides protection to the whole life of the purchaser as long as the scheduled premiums are paid.
Universal life Insurance - The advantage of this policy is the flexibility option it offers in the payment of the premium.
Variable Life - This type of policy provides death benefits and the policy holder has the option of distributing the premium in a variety of investments allowed in the policy with varying degrees of risk factor. The one great disadvantage is the cash value is not guaranteed and subjected to the risk of investments made by the policy holder.
Advantages Of Term Insurance
The one great disadvantage of the permanent insurance policy is the comparatively high premium rates, most of the people are likely to opt for a term insurance as it is less expensive than permanent insurance policy and it also provides death benefit to the policy holder.
Though financial advisors have promoted the cause of term insurance as a method of protection against financial disaster, they warn against the disadvantages of the policy. Though few term insurance policies allow the purchaser to convert the policy into permanent insurance, renewal is possible unless the policy contains a conversion clause. The term insurance policy which has a conversion clause is generally very expensive.
The Conversion Clause
A conversion clause in a term insurance policy helps the policy holder to convert it into a permanent insurance policy, for instance if a term policy is twenty year old and if it contains a ten year conversion clause and if the policy holder develops a health problem in the ninth year of the policy, he or she can opt for conversion to a permanent policy with the same coverage at a relatively lower annual premium than he or she would have had for a new policy.
Term insurance is more advantageous if it carries a conversion clause, because the policy holder can easily convert the policy in to permanent policy despite the medical constraints which will not be possible for the policy holder to qualify for a new policy. If the policy holder’s health declines he can go in for conversion to a permanent policy as the insurance company permits conversion till the age of sixty five, provided the policy has a conversion clause.
Term insurance policy also carries an annual renewable term which permit’s the policy holder to renew the policy annually but the premiums are high for a middle or old age policy holder. Annually renewable term policies are up to the age of ninety five. As the premiums are generally high most of the purchaser goes in for a specific period to suit his financial needs. Most term insurance policies are renewable only up to certain age.
Though some of the term policies permit conversion, these conversions are bound by several factors like, the policy holder may be required to submit the evidence for insurability to prove his health status. In such cases renewal is possible with a higher premium rate and in some cases the policy holder may not be qualified for renewal.
Therefore a policy buyer should carefully probe in his financial and health factors before opting for a term insurance or for a permanent policy, if he opts for a term insurance he should go in for the feature of convertibility because it this feature which helps him to convert to a permanent policy in case of bad health or just the realization that the coverage is required for a longer period.
Some Of The Renewal Provisions That Are Available In Term Insurance Policy Are:
• The Annual Renewable Term where the renewal of the policy is possible with higher premiums,
• Level term where the premium is fixed for a specified period and then increase sharply,
• Re-entry where the policy holder is required to undergo a medical examination and if he qualifies the premium offered is low, in case if the policy holder has a bad health, the premium rates are comparatively higher than the automatic renewable policy,
• Convertible term, where the policy holder can opt for conversion to cash value policy in later years.
Renewability Options
The renewability option in a term insurance allows the policy holder to renew the policy without a medical examination. Term insurance policy is particularly advantageous to a young policy holder because it offers the largest amount of protection at a least cost. The choice of the convertibility option helps the policy holder to renew the term insurance to permanent insurance, once when the income of the policy holder increases.
With the accumulation of cash values and fixed premiums whole life insurance policies are beneficial in the long run as it provides a guaranteed cash value, though the dividends are not guaranteed these policies fetch good dividends. Unlike term life insurance whole life assures guaranteed cash accumulation and the policy holder is also permitted to take loans against the policy at the current policy loan interest rate.
The importance of insurance can be clearly understood by the various monetary benefits provided by it, be it a term insurance or a permanent insurance the economic gains it provides to humanity is remarkable. The right choice of a policy helps the purchaser to reap good returns, further the conversion of the policy at the right time also helps in bringing gains to the policy holder.