Term Life Insurance vs. Convertible Term Life Insurance

[Anonymous]

My wife and I recently bought a house and are about to have two children and therefore have decided to purchase life insurance.

I am debating two insurance products: (1) simple 30 year term life insurance product with level premiums; or (2) a convertible term life insurance product that I will be able to convert to permanent insurance up to the age of 80 but it has rising premiums. I could also go with some combination of the two. In looking at the two options, it seems like the sum of the premiums for the convertible policy are less for the first 20 years than for the regular 30 year term policy but then the opposite is true after the initial 20 year period. I am generally skeptical of permanent life insurance policies due to the costs but I understand they can be helpful if your health deteriorates.

Does anyone have any experience in choosing between these two insurance products? The one thing I'm really struggling with is that I have no idea what my insurance needs will be in 10 to 20 to 30 years. Thoughts? Thanks in advance.

[Anonymous]

How old are you?

I think in most cases you should go with a level, term policy, and, if you need permanent insurance, buy it separately. Can you partially convert the policy? You certainly don't need permanent insurance in the same amount of your term insurance.

[Anonymous]

Go with the term. In 30 years your kids will be grown and out of college. Your house would (should) be paid off. No reason to pay for life insurance then.

[Anonymous]

We decided first the amount of insurance we needed and the amount we would be willing to pay. Then we made a combination of Term and Universal to be within the amount we were willing to pay but meeting the amount of insurance we needed. We have a larger amount of term and a smaller amount of Universal. The ratio ends of being roughly 70% term/ 30% universal. Its not the best plan we have seen, but it fits our budget right now.

No one has died yet, but it really has worked well for us. We have plenty of coverage for what we would need now if something happened but we are not breaking the bank monthly. Plus we know that we have some that will be around even after those big finances (kids, colleges, house, etc) are over.

Best of both worlds.

[Anonymous]

OP here. Thanks for the feedback. A few more details: my wife and I are both 35 and the convertible policy allows you to convert any amount. My gut is to keep it simple and go with the 30 year term but maybe I'll add a small amount of convertible.

[Anonymous]

Anonymous wrote:OP here. Thanks for the feedback. A few more details: my wife and I are both 35 and the convertible policy allows you to convert any amount. My gut is to keep it simple and go with the 30 year term but maybe I'll add a small amount of convertible.

Go with term. Unless you are really high earners or high net individuals, there is likely no reason for you to have whole/universal.

[Anonymous]

Why not buy both? This is similar to what another poster wrote.

Think about it this way. Your insurance needs will probably be subject to two trends over the next 30 years: Your need will slowly rise, because your income and expenses are rising. The counter-trend, is that it will also decline slowly as you save for retirement, and in bigger chunks as you pay for your children's education, until it goes to near zero at retirement.

So what you probably need is a lot of insurance for the next 20-25 years, and then less insurance for the 5-10 years after that.

With that in mind, try pricing out scenarios where you have the convertible policy do the "heavy lifting" during its cheaper first 20 years, with a 30 year term policy for less. Like, maybe a 75% to 25% split. Then when you get to year 20, you can reevaluate: Is the 30 year policy enough to carry you through until retirement, or is it worth keeping some fraction of the convertible policy (check - many term policies will allow a one-time reduction) for the next 10 years or longer? Or will you need some life insurance past age 80, such that it is worth converting some amount of it and hanging on forever.

As an aside, you should also go on a site like intellequote and get some numbers. Term policies (most of which are convertible to some degree) are really a commodity product, and there is heavy price competition. Doing this will help you make sure the rates you were offered are competitive. You might see other policy options there that provide better building blocks for a strategy like the one I described.

As another aside, I am also generally skeptical of permanent life insurance policies. My bet is that you won't end up converting and that term will be fine for you. Remember, you pay a price for the right to convert, baked into the term premium. And you will NEVER convert the full amount of a large term policy, so you're really just paying for a bigger option than you need. Might be worth trying to price out that Age 80 Term policy (which I otherwise like for you because it is cheaper for the first 20 years) without the conversion option, and then splitting THAT one into two policies, one smaller one with a conversion option, and one larger one without.

[Anonymous]

Anonymous wrote:Your insurance needs will probably be subject to two trends over the next 30 years: Your need will slowly rise, because your income and expenses are rising. The counter-trend, is that it will also decline slowly as you save for retirement, and in bigger chunks as you pay for your children's education, until it goes to near zero at retirement.

I am the PP who wrote this. Obviously, your needs will also rise sharply from their present level once you have children, but since you are planning ahead, I assumed you're starting from the assumption that you are buying policies as if you are already a parent (smart!). Also, since you just bought a house, you are about to get inundated with offers for "mortgage protection" life insurance policies. Don't even bother opening the envelopes.