23 Jun Converting term insurance to a whole life policy

 Q. My wife, 35, is leaving work due to a disability and she will get Social Security Disability. She has a work life insurance policy with a death benefit of $150,000 costing $223 a year. When she leaves, she can convert it to a whole life policy for $1,700 a year. She also has 22 years left on a 30-year $500,000 term policy, but she’s no longer insurable because of chronic conditions. Should we convert the policy? I’m the primary breadwinner and we have a 3-year-old daughter, and our retirement and college savings has been good.

A. We’re sorry to hear about your wife’s disability.

From what you said in your question, it seems that her disability will not change your lifestyle dramatically from a financial standpoint yet, and that’s a good thing.

However, the life insurance question is more complicated, and is a difficult one to answer without some additional information, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.

“Whole life insurance is generally the most expensive coverage you can buy, and in many cases you may end up being better off `buying term and investing the difference,’” he said. “But given your situation, it may make sense to consider converting her group term policy into the individual whole life.”

DeFelice said the first thing to do is to check with a financial advisor or insurance professional to confirm whether or not your wife is truly uninsurable. Not all chronic illnesses will prevent someone from getting life insurance, and certain carriers will have better underwriting guidelines than others for certain conditions, he said.

“A good advisor with experience writing life insurance should be able to do some informal pre-screening legwork up front with multiple carriers to determine whether or not she will have a shot getting through underwriting, and if so which carrier would give her the best chances,” he said. “Even a highly rated term policy may wind up being a cheaper option than the $1,700 annual premium for the $150,000 whole life policy.”

Next, he recommends you determine your true need for the additional coverage.

“If you are asking whether the $150,000 whole life policy’s $1,700 annual premium is a good investment from a purely mathematical standpoint, the answer — without sounding callous — would be it depends on your wife’s health,” DeFelice said.

You need to ask questions like: What exactly is the nature of her disability? Is it one that will likely shorten her life expectancy?

“If the medical prognosis is that she may only have another five or 10 years, then the answer may be to convert now to get the extra coverage,” he said.

However, you mentioned she already has a $500,000 term life policy, with 22 years remaining. If you are the primary breadwinner, you are not really looking for income replacement here, he said.

“And if she is disabled I would imagine you are also currently paying someone for child care, so there may not be a need for a big lump sum if it is already in the budget,” DeFelice said.

If your wife’s condition is something that she can reasonably expect to live with beyond the 22 years remaining on her existing $500,000 term policy, then you may not need the extra coverage now, he said.

“Check to see if that policy has a conversion option, as most good term policies also offer the opportunity to convert to whole life,” he said. “So, depending on her health down the road, that still gives you some flexibility to have permanent coverage in place if you need it.”

DeFelice notes that the conversion premium will be much more expensive 22 years from now, but it saves you the money today.

“An emotional topic for sure – but since your question raises many additional questions my best advice would be to sit down with a planner you can trust and talk all of this out,” he said. “It will help you make an informed decision whichever way you decide to go.”

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This story was first posted in June 2015.