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Considering whether to convert term policies

Dear Dr. Don,
I am 61 years old and have been reviewing my insurance coverage with a financial adviser. I have one permanent value policy and two term policies. According to the financial adviser, I could transfer the term policies to a universal life policy to have a cash value and transfer the permanent policy as well. I need your help. Is it worth doing it at my age? My concern on term policies is if I pass on converting them, the money is gone with no benefits at all. -- Jane Juncture


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Dear Jane,
Term insurance provides protection while it is kept in force. Just like auto insurance and homeowners insurance, the policy does not have any value after it is discontinued. The benefit is in providing insurance coverage while the policy is in force.

Although your term policies can be converted to universal life, they will only develop cash value after you have been paying the new premium for at least a year.

Don't second-guess the premiums you paid for the term policies over the years, regardless of whether it was the right decision, because you can't change the past.

Focus, instead, on your insurance needs going forward and the best way to meet those needs. The Bankrate feature, "Just the facts on life insurance," has a good overview of the different types of life insurance.

Start out by asking yourself how much life insurance you need to accomplish goals like supporting dependents, educating grandchildren, paying estate taxes, providing bequests to children and making charitable contributions. If your goals can be covered by your existing savings and investments, you may not need any additional life insurance coverage. A Bankrate interactive worksheet or calculator can help you determine your insurance needs.

If you have more insurance coverage than you need, you should consider discontinuing one or both of your term insurance policies to balance the amount of life insurance with your need. If you need more insurance, you can purchase additional coverage. The type of coverage to buy depends on the nature and duration of the need. If the need is for less than 10 years, consider additional term insurance coverage. If the need is for the remainder of your life you should consider universal life, universal variable life or whole-life policies.

While your existing permanent life insurance policy can be exchanged for a universal life policy, it is not easy to determine whether you would be better off with the existing policy or the proposed new policy. That determination requires a detailed comparison of the two policies. I don't have enough information to do that for you in this column.

You didn't explain how your financial adviser is compensated, but a possible motivation for a financial adviser who is also an insurance agent to suggest these changes is for the commission she earns on the sale of the universal life policy. I fully support financial professionals getting compensated for their time and advice, but unfortunately it's often left for the consumer to figure out whether the professional is putting the client's needs first.

Reviewing your insurance policies is an important part of financial planning. So is suggesting appropriate changes to those policies. If the adviser hasn't made it clear to you why these changes are appropriate and hasn't discussed the compensation in making these changes you need to have those discussions.

On a related note: Anyone relying on term life insurance provided through their employer should realize that the coverage will terminate if they lose their job. They may be able to convert some portion of the group term coverage to individual coverage. If that converted amount is not enough, they should consider purchasing some individual life insurance to supplement the group term insurance so that a job loss does not leave them with an inadequate amount of coverage.

Note: Thanks to Edward Graves, an insurance professor at The American College, for his insight in helping me answer this reader's question.

Bankrate.com's corrections policy
-- Posted: Sept. 27, 2005
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