Converting Or Porting Life Insurance: Which Option Suits You Best?

Life insurance is a crucial financial safety net for individuals and their families. When an employee's circumstances change, such as leaving their job, they are faced with a decision: to convert or port their existing life insurance policy. This choice is not merely a formality, as it can have significant implications for the policyholder's future financial planning. Porting allows for a seamless transition to a new insurer, maintaining the existing term life insurance policy, while converting offers a permanent whole life insurance policy with distinct advantages and drawbacks. Understanding these options is essential for employees to make an informed decision about their future financial security.

Converting vs porting: pros and cons

If you're leaving a job that provides life insurance as a benefit, you may be able to continue your coverage by porting or converting your policy. Whether you port or convert your policy, you will be responsible for paying the premiums as your former employer will no longer pay them.

Porting your life insurance policy

Porting your life insurance policy means continuing the term life insurance policy that your company provided. This option is only available for term life insurance policies, as any coverage a company offers is considered a group life policy. These policies do not have any cash value, so you will not be able to collect any cash from the policy. Instead, your beneficiaries will receive the death benefit of the policy when you pass away.

Converting your life insurance policy

Converting your life insurance policy means changing the group or term life insurance policy that your company offered to a permanent policy, typically a whole life insurance policy. You will be able to convert up to the amount of coverage the policy provided while you were employed with the company.

Pros and cons of porting

Porting your life insurance policy has several advantages and disadvantages. The premiums will be less expensive than if you were to convert your policy. However, you will only receive coverage for the term of the policy. For example, if the term was 30 years and you worked for the company for 15 years, the coverage will only be effective for 15 more years. While the premiums for porting your life insurance policy will be lower than converting it, they will increase as you age. Furthermore, there may be an age limit for the policy, and once you exceed that age limit, you will not be able to renew it.

Pros and cons of converting

Converting your life insurance policy to a permanent policy also has its pros and cons. The premiums will be more expensive, but they will remain the same, and you will continue to receive coverage until you pass away, as long as you continue to pay the premiums. Converting your policy allows you to extend your coverage without going through the underwriting process, which can be valuable if your health changes for the worse. Additionally, part of your premium goes toward the cost of insurance, and part of it goes toward building cash value, which you can access during retirement or for other reasons tax-free. However, the higher premium may be unaffordable, especially in retirement.

When to choose porting

Porting your life insurance policy is a good option if you are looking for a more affordable alternative to converting your policy. Porting allows you to continue the term life insurance policy that your company initially provided, which is often cheaper than converting to a permanent policy. This is especially beneficial if you are facing a temporary gap in insurance, such as a period of unemployment or a transition between jobs.

Another advantage of porting is that it provides flexibility in terms of coverage. You may have the option to increase or decrease the value of your policy, depending on the terms of your group policy. This can be useful if your circumstances or financial situation changes.

Porting is also a suitable option if you are in good health and want to maintain your current coverage without undergoing a new medical examination. This is because porting does not require you to go through the underwriting process again, and your health status will not affect the premium or your insurability.

Additionally, if you are a beneficiary of an employee who has passed away and you wish to continue their coverage, porting is a viable choice. In most cases, dependents can port their current coverage, ensuring that they remain protected under the policy.

It is important to note that porting is typically only available for a certain period, usually 31 days after the loss of coverage. This time frame is crucial, and employers play a vital role in informing employees about these deadlines.

When to choose converting

There are several reasons why converting your life insurance policy might be the best option for you. Firstly, converting your policy allows you to extend your coverage without going through the underwriting process again. This is especially beneficial if your health has deteriorated since you took out the original policy, as you will avoid paying astronomical rates or even being deemed uninsurable.

Secondly, converting to a permanent life insurance policy can be a good option if your budget has increased and you can now afford the higher premiums. Permanent policies are typically more expensive than term policies, but they offer the advantage of building cash value over time. This means that you can access the cash tax-free during retirement or for other reasons.

Another reason to choose converting is if you want to leave a legacy for your children. A permanent policy will ensure that there is money left for your children, even if you spend more liberally in retirement. Additionally, converting can be a good way to ensure that your final expenses, such as funeral costs, are covered so that your children are not burdened with these payments.

Finally, converting your life insurance policy can provide peace of mind and flexibility. You won't have to worry about age limits or renewing your policy, as coverage will continue until your passing as long as you pay the premiums. Additionally, you may be able to increase or decrease the value of your policy, depending on your needs.

How to convert a term life policy to a permanent policy

Converting a term life insurance policy to a permanent one is a straightforward process, but it requires careful consideration of your financial situation and goals. Here is a step-by-step guide on how to convert a term life policy to a permanent policy:

• Check your current policy: Review the terms and conditions of your existing term life insurance policy. Check if conversion is an option, as it is allowed on most policies. Understand the specific provisions and limitations of the conversion option. Some policies may allow conversion at any point during the term, while others may impose time restrictions, such as limiting the conversion period to the first 10 years of a 20-year term policy.
• Understand the term conversion period: Identify the timeframe during which you are eligible to convert your term policy. Contact your insurance company or agent to clarify the deadline by which the conversion must be completed. It is crucial to be mindful of this deadline to ensure a smooth transition.
• Evaluate your needs and goals: Before initiating the conversion process, carefully consider your financial objectives and long-term needs. Ask yourself why you want to convert to a permanent policy. Are you seeking lifelong coverage, building cash value, or ensuring a financial legacy for your heirs? Understanding your motivations will help you choose the right permanent policy option.
• Contact your insurance company or agent: Reach out to your insurance company or agent to express your intention to convert your term life policy to a permanent one. They will guide you through the necessary steps and provide you with the required documentation.
• Complete the conversion process: Typically, converting a term life policy does not require undergoing a medical exam or going through the underwriting process again. You will likely need to fill out a questionnaire, and your new permanent policy will be issued within a few days to a couple of weeks, depending on the insurer.

It is important to note that converting to a permanent policy will result in higher premiums. The increase in cost depends on factors such as your age at the time of conversion, the amount of coverage you choose to convert, and the type of permanent policy you select. Additionally, the permanent policies available for conversion may vary across insurers, with some offering universal life insurance or whole life insurance as the sole option. Therefore, it is advisable to consult a reputable financial or insurance professional to assess your unique circumstances and determine if converting your term life policy aligns with your financial goals.

Whole life insurance: pros and cons

Whole life insurance is a permanent insurance policy that covers you for your entire life. It is designed to last your entire life and will never expire as long as you continue to pay premiums, which remain fixed. This lifelong coverage is one of the key advantages of whole life insurance. It provides peace of mind that your loved ones will receive a death benefit payout, no matter when you pass away.

Whole life insurance also has a cash value component. This means that, in addition to the death benefit, you can build cash value, which accrues interest over time. This cash value can be accessed during your lifetime through withdrawals or loans, or by surrendering the policy. This cash value growth is an attractive feature for those who want to build a nest egg for the future, or for those who want to leave a legacy for their heirs.

However, whole life insurance is generally more expensive than term life insurance. This is because the policy has a savings component, and insurance salespeople typically receive larger commissions for selling these policies. The higher premiums may be a challenge for those who are young or who don't have a lot of disposable income.

Another disadvantage of whole life insurance is the lack of investment control. The insurance company decides how to invest the cash value, and this may be an issue for those who are experienced investors and want more control over their investments.

Whole life insurance is also less flexible than other types of permanent life insurance, such as universal or variable life insurance, as the premiums and death benefits are fixed and cannot be adjusted.

Pros:

• Lifelong coverage
• Fixed premiums
• Cash value growth with potential for tax-free growth
• Potential loan collateral

Cons:

• Higher premiums
• Smaller death benefit
• Lack of investment control
• Less flexible than other permanent life insurance options

Frequently asked questions