Convert Term Life Into Permanent Life Insurance To Keep Your Rate Class

To keep your life insurance rate class, one way is to convert your term life into a permanent life insurance policy. The cost of your life insurance premiums depends on your health rate class. This post will share when converting a term life policy makes sense and when it may not.

In a previous post, I recommended it would be wise to get a life insurance policy before you see a doctor for any non-life threatening health issue.

By locking in a life insurance policy first, you reduce your chances of life insurance companies raising your premiums due to additional health issues on your medical record.

Health Mistake That Made Life Insurance More Expensive For Me

In 2017, I went to see an overzealous sleep doctor. He diagnosed me with snoring, a deviated septum, and sleep apnea. To pad his bill, he also recommended I try a CPAP machine and go through a series of sleep tests.

I figured why not since my health insurance would pay for everything. I hadn't seen a single doctor in years, despite paying over $20,000 a year in premiums.

After I did all the sleep tests, I went to check with my existing life insurance company on renewing my life insurance policy. It was a $1 million, 10-year term policy I took out in 2013.

A term life insurance policy is appropriate for most people who want life insurance. Unfortunately, I discovered the renewal premium would jump from $40/month to $450/month!

Part of the increase in premium was because I was four years older and over 40. There seems to be a life insurance premium jump at 40 and 45. But most of the reason for the jump was due to the sleep apnea mark on my medical record.

Check out Policygenius if you want to get no obligation, real life insurance quotes all in one place. Both my wife and I use Policygenius to save on our life insurance policies.

A Life Insurance Solution

After the disappointing news, I thought my life insurance options would be over after my term policy expired in 2023. Therefore, since hearing about the higher renewal premiums, I made it my mission to boost my wealth by at least $1 million before my $1 million term policy ran out.

It just so happened that I did have a way to continue getting life insurance based on my old “excellent athletic” health rating I received in 2013 when I first got my term policy. The official term for the top life insurance rating is called “Preferred Plus” followed by Preferred, Standard Plus, and Standard.

This post on converting a policy from term to permanent is pertinent for those who:

  • Want to continue having affordable life insurance coverage, but are facing a much higher term life insurance rate upon renewal
  • Desire to understand the various nuances of a permanent life insurance policy
  • Seek to understand who permanent life insurance is for
  • Want to see examples of how much a universal life insurance policy costs
  • Have always held a negative assumption about permanent life insurance, but can't elaborate why beyond higher premiums

Convert Term Life Into Permanent Life To Keep Your Rate Class

The one thing I did extensively during shelter-in-place was learn as much as possible about the various life insurance options . One interesting fact is some term life insurance policies can convert to a permanent life insurance policies to keep your health rate class.

Therefore, I immediately called my life insurance carrier to see if this was true for my policy. Fortunately, they said yes. Not only could I convert my term life insurance policy into a permanent life insurance policy, but the new premium would also be based on my Preferred Plus rating from 2013. Further, I would not have to do another medical exam!

Medical Exam Needed For Million Dollar Life Insurance Policies

Having a medical exam where someone comes to your house to collect your blood and urine is annoying. It is probably the most frequent reason why people either don't have any life insurance. Some get less life insurance than they want just to avoid the medical exam.

If you are getting a $1 million or greater life insurance policy, chances are high that you will need to get your blood drawn and your urine collected. Here are some other no medical exam life insurance solutions.

As the father of a five-year-old and a three-year-old, I'm excited to be able to have the OPTION to have continued life insurance coverage based on my Preferred Plus rate. The goal is to have life insurance until they graduate from college or become financially independent adults.

Let's look at the benefits of permanent life insurance, also commonly referred to as whole life insurance or cash value life insurance. Yes, all the terms can get confusing.

Benefits Of Permanent Life Insurance

1) Lifetime Protection

Instead of having a term policy that has an expiration date, permanent life insurance covers your entire life so long as premiums are paid. Having a permanent life insurance policy helps provide peace of mind through all stages of life. Whether you are just starting out, raising a family, or living in retirement, permanent life will be there. Here are reasons to get a whole life policy even though it’s more expensive.

In 2013, I got a 10-year, $1 million term life insurance police. While I no longer had a job, I still had a ~$1 million mortgage. If I died, I didn't want my wife to be saddled with so much debt.

At the time, we were also uncertain about whether or not to have kids. Had I known we would have a kid in 2017 and another in 2019, I would have gotten at least a 20-year policy.

With a permanent life insurance policy, you won't have to worry about all the different curve balls life may throw your way.

2) Flexibility

Basically, there are four different types of permanent life insurance to address different goals:

The main difference in all these types of permanent life insurance policies is how the cash value portion is invested. The cash value is the portion of a permanent life insurance policy that gets built up over time based on the premiums you pay.

In my case, I'm able to convert my term life insurance policy into a universal life policy. Universal life is a conservative type of permanent life insurance. Universal life provides the ability to adjust payment amounts and death benefits to satisfy changing goals, needs, and budgets.

When you have enough cash value built up, you can even stop paying premiums. You can use your cash value to keep the policy active.

3) Cash Accumulation

Permanent life insurance provides a cash account that can supplement education and retirement needs. Meanwhile, the cash value also benefits from tax-deferred growth (similar to a 401(k)) at competitive interest rates.

The cash value is the main difference that differentiates a term life insurance policy from a permanent life insurance policy. The premiums you pay for a permanent life insurance policy go towards paying for the death benefit amount and the cash value.

Given the tax-advantageous growth of the cash value, getting a permanent life insurance policy is another way for people to build wealth and manage their estates.

Why Doesn't Everybody Get A Permanent Life Insurance Policy?

One of the main reasons why people don't consider a permanent life insurance policy is because it's more difficult to understand compared to a term life insurance policy.

Convert Term Life Into Permanent Life Insurance To Keep Your Rate Class

You can think about a term life insurance policy similar to paying rent for an apartment. Your rent pays for shelter each month and nothing more. Once the lease is over, you can either extend your lease or move out. You do not build equity with rent.

A permanent life insurance policy is kind of like paying an amortizing mortgage. Part of your mortgage payment goes to paying down principal and building equity (cash value). The remaining portion goes to paying interest (the death benefit). Over time, your cash value (equity) grows as it is reinvested.

The second reason why permanent life insurance isn't very popular is due to not knowing all the options. I've always known about permanent life insurance, but I stopped thinking about it after I got my term life insurance policy.

Most people don't care to research their life insurance options until it's needed, e.g. bought a home with a mortgage, had kids, came into a lot of wealth, got a bad disease.

The final reason, and probably the main reason is the cost. Just like how it's usually cheaper to pay rent or an interest-only mortgage, it's cheaper to just pay for term life insurance rather than permanent life insurance.

Example Of A Universal Life Insurance Policy

Below is an example of an “option A” universal life insurance policy I received after talking with the insurance agent for an hour. This policy is what I'll get if I convert 100% of my $1 million term life insurance policy into a universal life insurance policy and keep my same Preferred Plus rating.

To reduce my premium, I can convert a smaller portion of the $1 million term policy into a permanent life insurance policy and keep the remaining death benefit amount until my term life insurance policy runs out in 2023.

For example, I could convert $250,000 of my $1 million term life insurance policy into a universal life insurance policy and keep the remaining $750,000 until it expires in 2023. However, the longer I wait, the higher the premium and the less time I get to build the cash value given rates go up with age.

Let's study this universal life insurance benefit growth chart from USAA carefully.

Universal Life Benefit Growth Chart

Convert Term Life Into Permanent Life Insurance If Your Premiums Are Going Way Up

As you can see from the chart, my universal life insurance policy will cost $958/month! That's obviously much higher than my existing $40/month, so why the heck would I go this route?

The main reasons are as mentioned above: 1) building up the cash value, 2) having a permanent life insurance policy, and 3) being able to get the best premium rate based on my Preferred Plus 2013 health exam and not my suboptimal 2017 health examination.

Although my monthly premium is $958/month, $640/month of that amount is used towards building my cash value. Therefore, you can say my monthly life insurance premium to cover the death benefit is “only” $318/month compared to the $450/month I was quoted in 2017 when I tried to renew.

I'm guessing if I check with my existing life insurance provider again with a medical exam, my new $1 million term life insurance renewal premium might be over $550/month. Therefore, converting to a universal life insurance policy might actually save me over $200/month in death benefit coverage.

But to say that my life insurance premium is only $318/month is understating the value of this permanent life insurance policy due to the potential of tax-deferred growth in the cash value, the guaranteed minimum rate of return, plus the fixed monthly premium cost for the rest of my life.

Guaranteed Returns For Your Cash Value

This universal life insurance plan has a guaranteed minimum 2% annual rate of return on the cash value. At that time, 2% compared favorably with the 10-year bond yield at under 0.8% and the Fed Funds rate at 0% – 0.125%. The best online bank interest rate back then was around 0.4%.

Rates are now much higher thanks to the Fed aggressively raising interest rates. This is why it's important to remember that everything is relative when it comes to finance.

Further, there was the potential for the cash value to return greater than a 2% annual return. The rate of return for the cash value was 4.25%. At at one point, this compared very favorably when the S&P 500 was down 32% in March 2020.

In the below chart, take a look at the growth of the cash value based on a 2%, 3.12%, and 4.25% annual rate of return.

Convert Term Life Into Permanent Life Insurance If Your Premiums Are Going Way Up

As you can see from the chart above, over time, the cash value really starts to compound. The cash value can be used to boost the death benefit. It can generate an income stream. It can pay for the universal life insurance premium. Or borrow from your cash value.

Watch Out For Option A

However, there is one big issue with “Option A” universal life insurance. If you die, your beneficiaries only get the death benefit amount of $1 million. Your beneficiaries do not get the remaining cash value! The remaining cash value is kept by your life insurance company. Holy moly!

To avoid having the life insurance company keep all your accumulated cash value, you should call up your life insurance company and see if you can exchange the cash value for a higher death benefit. Ask them what other options you have for using the cash value before death.

The other option for those who want their beneficiaries to keep the cash value is to choose “Option B” universal life insurance.

Option B Universal Life Insurance

With “Option B” universal life insurance, your beneficiaries will receive your death benefit and accumulated cash value. Of course, there is no free lunch. Option B premiums are even higher. Let's look at the information below.

Life Insurance Benefit Growth Chart

With Option B, my monthly premium goes up to an impressive $1,660. $1,291 of the $1,660 goes towards building cash value. Therefore, the cost of the $1 million death benefit is $369/month on average for the first year. Despite the much higher premium, I never have to worry about losing all the cash value. Instead, all the cash value will go to my beneficiaries.

Below is a table that shows the growth of the cash value using a 2% return, 3.12% return, and a 4.25% return. The death benefit columns are now the summation of the $1 million death benefit plus accumulated cash value. After 40 years, the cash value grows to over $1 million, meaning if I die at 82, I will leave over $2 million to my beneficiaries, tax-free, provided my estate’s value is below the estate tax threshold at the time.

Life Insurance policy table

Who Should Get Permanent Life Insurance?

Hopefully, my two universal life insurance policy examples illustrate an option if your term life insurance premium is going way up due to a health issue or older age. By converting to a permanent life insurance policy, you get to keep the higher rating that you once received years ago.

Let's be frank, a permanent life insurance policy costs a lot more than a term life insurance policy. As a result, most people will just get a term, which is the most efficient and cost-effective way to go. There are just incidences, where life changes, health changes, and needs changes beyond the term limit.

My favorite way to get an affordable term life insurance policy is with Policygenius, a life insurance marketplace that matches the best life insurance offers based on your application.

People Who Should Consider Getting A Permanent Life Insurance Policy

  • Parents with lifelong dependents, e.g. a child with down syndrome or severe cerebral palsy (bless them all).
  • Parents who have gone through a difficult life and want lifelong peace of mind for themselves and for their beneficiaries.
  • Debtors or parents who work in hazardous industries with unknown future health risks.
  • Folks who plan to have a much higher net worth and want to conduct estate planning to minimize taxes upon death.
  • Investors who contribute the maximum to their 401(k) and other tax-advantageous retirement accounts and want another way to grow wealth in a tax-advantageous manner.

If at least a couple of these conditions pertain to you, getting a permanent life insurance plan makes sense. If you have a term life insurance policy, converting your term life insurance plan to a permanent life insurance is something to consider. Otherwise, go with the plain vanilla term life insurance plan. It is your best bet.

My Life Insurance Plan

As for me, I like having a new way of conservatively growing my wealth in another tax-advantageous manner. After all, I've maxed out my 401(k) and now Solo 401(k) since 2000. We also contribute to two 529 plans. Finally, neither my wife nor I have stable day job income.

Since we currently have excess cash flow due to passive retirement income and online income, we are considering permanent life. A permanent life insurance policy solves two goals of insuring for life and investing more for our future.

Because I place a premium on peace of mind, I'm strongly considering converting at least a portion of my $1 million term life insurance policy into a permanent life policy before it runs out. It feels good being able to lock in my Preferred Plus rating from 2013 since I inaccurately forecasted my future.

My Benefit Growth Chart

Below is the benefit growth chart example. It shows what happens if I convert $500,000 of my $1 million term policy into an option B universal life policy. A Option B policy is where my beneficiaries get the death benefit and the cash value.

My monthly premium outlay drops to a more affordable $830/month from $1,660/month. The death benefit reaches over $1 million after 41 years assuming relatively conservative returns. If the goal is to provide an overall death benefit of $1 million, then this is one way to go.

Universal life insurance

Although a life insurance policy is an act of kindness for my family, a life insurance policy also provides me peace of mind if something bad were to happen.

Final Life Insurance Considerations

Finally, before you get a permanent life insurance policy, estimate the value of your estate. Also make estate value assumptions in the future.

If your estate will significantly blow past the estimated estate tax exemption amount, then trying to build more wealth through a permanent life insurance policy isn't as effective.

That said, if you have enough cash flow to easily afford a permanent life insurance policy, then there's not much downside in building more wealth in this tax-efficient manner.

For most folks, getting a term life insurance policy is good enough. You can apply with well-known providers one-by-one. But the better solution is to apply for life insurance through Policygenius. As an insurance marketplace, Policygenius brings the best qualified providers to their platform where they vie for your business. This in turn not only saves you time but a lot of money. And best of all, getting personalized insurance quotes on Policygenius is completely free, secure, and comes with no obligations.

It's nice to know you can convert term life into a permanent life policy later if you wish. At the very least, you should check the latest term life insurance rates.

I hope you enjoyed this article on how to convert term life insurance into permanent to keep your rate class. For even more great content, join 60,000+ others and sign up for my free weekly newsletter to get smarter, build more wealth, and never miss the most important financial happenings.

54 thoughts on “Convert Term Life Into Permanent Life Insurance To Keep Your Rate Class”

  1. Good article, time for me to schedule a conversation with my agent. I got an IUL 10 years ago at 34: $500k benefit, ~$350/mo premiums with preferred plus status non smoker. My fees were heavily front loaded so at 10 years the surrender and accumulation value became equal (eg surrender charges were eliminated). The Indexed rate is 0-10%, not great in a bull market but always positive interest. Paid 42k to date, current accumulation value is 35k so for the 500k benefit costs me $58/mo.

    Sam, you have me wanted to do review my options with the cash value (add t death benefit?) and if there are any increased costs/reduced contribution to cash value as I age…, hmm.

  2. Universal policies are no better than Ponzi schemes as the projections never play out while defeating the whole purpose of insurance. Secondly, permanent insurance can be structured so badly that you wish you didn’t buy it!

    You can buy some run of the mill whole life policy from a company like state farm as all that you are doing is buying a policy that has a super expensive death benefit with nothing to show for it. In that case, you might as well just have bought a simple term policy for the maximum amount of time you can get.

    When buying whole life, it must be done via a mutual life insurance company that is customized based on your income and has multiple riders such as paid up additions, term rider, LTC rider, waiver of premium etc. You get the most benefit from whole life when it is structured such that you get minimum death benefit and maximum cash value without triggering MEC.

  3. Maybe I’ve had a somewhat similar experience. I was a big saver in my early 20’s, and my sister became a new NWM life insurance agent. You know what happened next. I bought several whole life policies between 26 to 31 years old for 450k or so total coverage. I was making 14k when I bought 1st one and 28k when I purchased the last. Never thought much about it and just paid premiums and watched statements. Saw how controversial the topic was over the years and didn’t worry. Later on became a market investor and heard all the “boy are you stupid for buying whole life” articles. Funny thing is, they always say you can do better; well I did better and over a number of years the cash value I once coveted became just a drop in the bucket of my overall portfolio. But I became convinced I had made a mistake but never did anything. Finally realized I should pull out paid up additions, because mine was type A and if I died I didn’t want insurance company getting my cash value. But now, I look around and I’m glad I have lifetime coverage, because if I die it’ll pay my mortgage so my wife won’t have to worry. We recently moved pre-retirement to a high-priced CA beach town, and one of the reasons I felt comfortable doing that is because of my life insurance. So now I’m back to being good with it and being glad I bought the policies when young.

    So I went from drinking the Kool-aid, to doubt, to regret, and back again to being happy with my whole life. Even though some of the reasons justifying the policies originally aren’t true anymore, and some things about whole life are oversold (there are alternative ways) to my surprise it has ended up doing about what I’d hoped it would. And I never had to worry about converting anything to anything or my health or that my loved ones wouldn’t have enough if I got hit by a truck. Buying a good chunk while young has worked out alright. That said, at the time I bought mine ROTH IRAs didn’t exist, and interest rates were high compared to today. I’m not sure whether or not it’s wise for a young person now to do what I did. I wish I knew but it’s all so complex.

    Maybe I just got lucky. If I hadn’t become an aggressive market investor in the next decade and done so well otherwise perhaps I would regret it. Then I guess I’d hear “you could’ve done better by getting term and investing the difference” ringing in my ears. But then I’m not sure it’d make that much difference since some people just never do very well with their investments anyway.

  4. Thank you Sam for this article and for describing your situation on why a permanent policy may make sense for you. What I haven’t seen from others that are against permanent insurance from the comments is the consideration that your life and health situation can change drastically and there’s no way you can avoid it, just like Sam mentioned.

    Like most people, I hope to be happy and healthy through age 100 if possible but how do I know if I’m someone that would get that type of life? Additionally, it’s the wrong assessment to compare the cash values of your permanent policy to investments, it’s more like the conservative part of your portfolio – the fixed income portion that can stay afloat if the market tanks and the part you normally would just save in cash. Although we saw a pretty quick recovery this time from COVID-19 I knew a lot of ppl ready to retire in 2008 and 2009 and they had to delay 3-4 years due to the market. And the ones that freaked and pulled out had a rougher time and a longer road to financial recovery. It would be nice to have a plan that could bridge a situation like that.

    If you are financially well off, you may be fine but I assume a lot of your savings may be in cash to be able to avoid something drastic like that if you are just dependent solely on your investments to retire. I believe in a very balanced and customized approach to your finances and permanent insurance can help create that for certain people with certain risk tolerances and tendencies.

    I’ve always preferred to save my cash in my permanent policies that I’ve built over time since age 21 because I want a vehicle that can transfer wealth tax free to my loved ones, even if I die at age 100. If we are well off then I will provide funds for charities and foundations to keep moving the world forward.

    My personal experience is that I have over $130K of cash value that I’ve used as my own line of credit to purchase properties, expand my business, and do other things within my means. I have over $1.3 Million worth of property and I’m 34 yrs old. I wished I would have been able to retire like Sam at this age but I had a lot of family obligations early on so didn’t really have a chance to get into investments other than my SIMPLE IRA. Since I haven’t qualified for the ROTH IRA since age 26 due to my business and take home income; I had to find another way to put money away with tax deferred growth that will be tax free for my family and myself as I get older. I also bought my first home at 24 but had no time and intention to go into real estate investing at the time.

    I estimate my cash value as it stands right now will be over $1.5 million by the time I’m 65 and that is guaranteed. The plans i chose where Whole Life that are paid up in 10-20 yrs. I also have term bc I believe I need to insure 20 times my income and term is the cheapest but I have $2.5 million in permanent insurance.

    Some of these policies will be paid off in the next 2 years since I started young. I will be able to continue to use this cash to help acquire more assets and not have to depend on the banks to give me loans for certain things. This cash value is my leverage as an asset but loans do not show up as debt.

    Sharing all this as another example of a person like myself who is an entrepreneur with no 401K available, no matching other than what I can match myself on my SIMPLE IRA and good cash flow that I can put away. Not everyone can stomach losses in the market so you just have to balance how you put away your money and save it.

    Also personal beliefs and values affect the decision to purchase permanent insurance or not. I believe I always want to pass on wealth either to my family or others in need. Permanent life insurance is the most tax efficient way to do so since your coverage never expires. I also believe life doesn’t always go as you plan so I’d rather have a more failsafe plan than just depending on some variables out of your control like your health and mortality.

    Sam, your kids are young and your insurability is no longer as good as before. I agree that the permanent option is a great alternative for you since you already have a great cash flow and you seem financially sound and disciplined. Those are the pieces that makes you a great fit for permanent insurance.

    Sorry for the long post, I’m very passionate about this and don’t like the misinformation out there of blanket statements of why permanent never makes financial sense. That’s untrue and you just have to have a case by case analysis of your own unique situation.

    1. Thanks for your thoughts! I’m impressed you started with life insurance so early. How did you come to this decision at 21?

      I wonder if there is this renting versus buying aspect it’s a life insurance. Another words, and often cost more money to buy in the beginning, but within 30 years you should on a house free and clear. Whereas with the renter, in 30 years, The average renter did not properly save and invest the entire difference and therefore ends up with a lower net worth.

      From your example, it’s clear that you are discipline financially, and will end up a multi millionaire by the time you’re 45. Even though a permanent life insurance policy will have cost you more, it’s nice to know that you’re set for life and you can use your cash value to pay for the policy and not have to worry about life insurance anymore.

      Or someone like me, a permanent life insurance policy is expensive now. But at least for the health rate class, I’m able to rewind time by seven years and retain the highest rate class if I go with conversion.

      I enjoy looking at options and solutions to problems people face. I wish more people would have an open mind as well and just share blanket statements with no reasoning.

  5. wow I didn’t realize term policies can be converted like that. Fascinating! And that’s great to hear it allows you to retain your original rating. That’s huge. Permanent life insurance is expensive that’s for sure. But I can see how it’s a good option in your case.

    Good to know on the cash value part not always being accessible to the beneficiaries! I didn’t know that. Thanks for the super thorough and insightful post!

  6. The trick is to find an advisor that is willing to strip the fees to the minimum…

    Ask the broker what he owns, if he doesn’t own what he is recommending. Find someone else…

    I’m earning 5+% on cash year over year on whole life, tax-free.

  7. I don’t ever recommend anyone getting permanent life insurance. I had VUL and totally regret having paid so much into it once I understood how it actually worked.
    If you look at the table, the columns you need to focus on are the GUARANTEED. At some point this goes to $0. That means there’s no cash value and no death benefit.
    Stick with term insurance. Shop around if you think $450/mo is too expensive. Take the $640 you’re willing to pay towards the cash value portion of the permanent life policy and invest it for you and your family.

      1. This was many years ago but still during a bull market. I did choose the option to keep the cash value but after all the fees were deducted I never recovered what I put into it. At the time I had both VUL and term life. I decided to cancel VUL, extend the life of my term policy and increase face amount. I too have preferred rating so I made sure I got the longest term possible to keep the low cost. Once I consider myself to be self insured I can cancel the policy but since the cost is so low I’ll keep it until the policy reaches end of term.

        1. Same experience…I’ve had two universal policies collapse to the guaranteed returns, so the policy premiums blew up and I had to let both lapse.

          I didn’t pick the above but got stuck with paying for them.

          Can’t say more because I expect the above to go to litigation after the (formerly) insured dies.

          1. Fascinating feedback. Thanks guys! I’ll surely ask about this scenario the next time I speak to an insurance agent.

            Self insuring seems like my likely option. It’ll be fun to try and boost net worth by X amount over the next couple years. Although, this depression is making it tough.

  8. All depends on what you’re comfortable with. I have both term and permanent (Variable Universal Life). No one knows when the unexpected will happen. If you pass away in year 5 of the policies then you’re glad you have insurance. If you live until 90 then you didn’t get your money’s worth on the permanent policy since you could have invested the “excess premium” separately. Both policies provide a peace of mind for my family. Once my kids are off on their own, there is less need for protection. I do see benefits in my VUL. The cash value is not listed as an asset on the financial aid application and when I take a loan on the policy, it is not reported as income (hence, both have no impact on scholarship/grants). As I plan for retirement, the cash value is allowed for a tax-free transfer into annuity, LTC, etc that is more aligned with my retirement needs. If I keep the VUL as is, I will take tax-free income (via loan) to supplement my retirement.

    If you are diligent and plan to invest the “excess premium” on your own, find out if your company has after-tax 401K contribution. This is separate from pre-tax 401K or Roth 401k. You can transfer the after-tax contribution into a Roth IRA and let it grow tax-free.

    1. Thanks for your thoughts. How has your Variable Universal Life insurance policy’s cash value performed in this bull market? Not getting a VUL between 2009 – 2014 is one of the things I wonder about given we’ve had such a bull market since.

      Interesting info regarding the cash value not listed as an asset on FAFSA.

      1. When I first bought the VUL I was completely hands off and trusted the agent to manage the investments on the VUL. My cash value did grow but I wasn’t thinking much about it. As my family grew, I exchanged for a whole life policy, increase death benefit with 4Xs higher premium. My logic was I wanted safer investments. Now that I’m focused on financial planning (and it’s what I do), I understand life insurance a lot better. I realized that the whole life agent did not tell me my policy has a pay period until I’m 100 years old. Granted I could have stopped paying premium when I’m 65 but I question how long my cash value will be able to support future cost of insurance. Insurance cost will only go higher as we get older. Just because I stopped paying premium does not mean there is no more cost of insurance. It’s paid from your cash value/ investments.
        I decided to exchange my life insurance back to VUL with higher DB and 30% lower in premium. I know it’s a 20yr premium pay. I’m completely hands-on in managing the mutual fund investments in the cash value. I manage it similar to how I manage my retirement accounts. For VULs, insurance companies will have a list of mutual funds for investments. The policies for my kids are mostly in Nasdaq 100, S&P500 and Large Cap Growth. It’s a way to help them get started and because their time horizon is so long, I’m fine with the risk. I expect the cash value to exceed death benefit, eventually. Once that happens, the cash value will be the new DB.

  9. Ms. Conviviality

    This article was really good at explaining why someone would want to consider permanent life insurance. The cost is justified if the benefits are there. It seems that people who have all their desired financial assets set would want to consider permanent life insurance. My brother and sister-in-law are insurance brokers. They both have whole life policies and were trying to get me to see the benefits of having a whole life policy too. I agreed with them that the cash surrender value is beneficial for them in case they run into unforeseen financial difficulties in the future and their two children will never need to worry about how to support their parents financially. My main reason for not getting whole life is that we don’t have dependents and the higher premiums are diverting cash away from our goal of owning several investment properties that will be the main source of our passive income. After reading your reasons for why someone would want to purchase whole life insurance, I’m now more confident that I made the right decision to stick with term life. My term life carrier reached out to me a couple of weeks ago and mentioned that I should consider renewing my term life policy before I have an “age change” since it would help to guarantee lower premiums for the next 10 or 20 years. This is really thoughtful of them but I’m hoping that there isn’t a catch. I still have 14 years on the $500,000 policy. They’ve quoted me a $44/month premium ($15 increase from what I’m paying now) for a new 20 year $1M term life policy which sounds great to me. The new policy requires a medical exam.

    1. Yes, no dependents, especially life-long dependents means there’s less of a need for a permanent life insurance policy. Some parents have children with severe disabilities that need lifelong help, god bless them.

      With 14 years left on your $500K policy, I’m assuming you’ll be able to pay down a lot, if not all of your liability within 14 years? $29/month is so cheap now.

      The way I see a medical exam is that it’s a PITA free way to get a medical checkup. But physicals are free anyway.. it just forces you to do one so you can work on things.

      $44/month premium for a new 20-year, $1M term IS cheap if you can get it.

      1. Ms. Conviviality

        In the process of commenting on this blog today, it really did make me question why my insurance provider was providing me such a good deal. So, I just reviewed the policy documents. For whatever reason, I had forgotten that my $500,000 policy wasn’t a 20 year policy but rather a 60 year policy so it’ll last until I’m 95 years old! I suppose the 34 year old me wanted to be very conservative. Now I’ve got to decide whether to stick with a $29/month $500,000 policy for 55 years or a $44/month for $1M for 20 years. I’m thinking the benefits would be more useful to my husband and parents in the next 20 years than it would be in the later years. Neither “need” the money but I’d rather everyone be better off once I’m gone.

        1. Ah! Big difference! And I’m glad this post has helped you think things through with your existing policy.

          I would just keep what you have. Surely you’ll be debt free by 95! Your policy is so cheap.

    1. 10-year TERM policy you mean? It all depends on your liabilities and needs during this time period. If you can pay down all/most of your liability and have no more dependents within 10 years, then a 10-year term policy is great.

      1. I think he means a 10 pay life policy. It’s a permanent policy with premiums for 10 years then paid up.

  10. This post is precisely why it’s never wise to rely on one single financial blog for your investment advice . I have been a avid reader of yours but this post falls short on multiple levels . A universal or variable or whole life insurance is almost never a better life insurance option than a term life insurance . It’s associated with more fees, less efficient and more costly investment options. The cash value while guaranteed still pales in comparison than if you investment the money in a low cost index fund .
    Also unlike the term life insurance , cancellation of the policy is more straight forward and less costly unlike a whole life , universal insurance .

    Anyways, I understand the need to provide for your family and “peace of mind “ but this post is one that truly counts as a bad financial advice on my book. I am a physician and we are constantly inundated with calls from life insurance brokers peddling whole life and universal insurance options and they almost never mention term life for obvious reasons – they make money from the former option

    1. Sounds good. You got to do what’s right for you. Not sure if you saw the couple times I said term life insurance is the best and most efficient for most people.

      And sorry you are getting bombarded. I wonder if your number was sold to insurance carriers? I’ve never got bombarded ever.

      Given you are against a permanent life policy, what would your solution be for someone who has a term policy up for renewal at 10X or greater the initial premium and wants life insurance for the next 10-30 years? This is the main solution I’m trying to solve for.

      Let’s say the person also has good cash flow and maxes out all tax-advantageous retirement accounts and has a disabled child.

      What is your life insurance solution to this family?

      I am hoping that instead of readers just saying somethings bad, to offer up some solutions instead. This is a solutions- focused financial website that looks at all angles as openly as possible.


  11. I met with an insurance person to discuss permanent life insurance policy. To be honest, it was very confusing. He told me that the maximum I could withdraw without penalty or tax was 80% of the cash value. Even though the monthly premium is the same, the cost of the policy goes up with your age, which eats up your cash balance value.

  12. Financial Freedom Countdown

    I had the option to continue my low work life insurance rates if I paid the premiums. Considering that I have no dependents it was not an option worth exploring.

    Paid off house and stock assets should be a good bonus to my next of kin if the situation arises.

  13. Permanent life insurance is almost always a bad financial decision. Just think about WHY it’s so aggressively pushed on customers by insurance salesmen— it makes them $$$. Sam- your “peace of mind” mentality is becoming ultra-conservative and no longer rational…

    1. Actually, nobody has pushed permanent life insurance on me at all. Have you spent time looking at the examples in this post? The reason why products exist is due to demand and need.

      I think it’s always great to run the numbers and do the analysis instead of just making blanket statements. Maybe you can share how life insurance carriers have been aggressively pushing a permanent life insurance policy on you. I’ve literally never had anyone push a permanent life insurance policy on me.

      Saying all things are bad or good shows a lack of understanding or a desire to understand because we’re so set in our ways of thinking.

      I’m reminded of the absolute assumption By the general public that contributing to a Roth IRA is the best thing ever. It’s not for all people.

      1. You can bet with blanket statements, the reader has not read the entire post and done the analysis. It’s just laziness, especially when someone doesn’t provide any rational rebuttal.

        I think being able to build wealth tax deferred is great. Especially if you started your permanent life insurance policy back in 2009. You saw a tremendous amount of growth in the cash value.

      2. Hey Sam,
        I spent 4+ years as a life and health underwriter/management, before moving into Agency about 17 years ago. Never “pushed” anything on anybody. Simply did a needs analysis (outstanding loans, income replacement, final expense costs and education costs) to determine what was needed. In general, younger folks have a greater need (younger family, more debt- haven’t paid off the student debt, maybe newly into their mortgage so higher balance, etc etc). As we get older, the kids grow, mortgage is paid off, networth rises, generally speaking the need reduces.

        Term is great for young people. You can buy a lot more, at a lower cost. Like renting instead of owning, but it doesn’t build cash value and it’s for a set period of time (obviously).

        Permanent serves a great purpose too. And, if you can afford it when you are young, you lock in a solid rate for the duration. Personally, I have both. Lots of my term was set with 20 and 30 year durations. The length of my mortgage both home and my small office, the time period my kids would be in childhood, etc on the term. A separate policy or two of permanent to cover expenses in transition for my wife if/ when something happens that will always be there.


        1. Cool. Good to know. Needs based is needs based.

          I think about my neighbor, who has a paraplegic daughter and a son who hasn’t been able to launch and still depends on his parents at age 30.

          Who is going to take care of the daughter once the parents, who are around 60-something pass? Not the son.

          24-7 care probably costs over $180,000 a year + equipment, classes. A permanent life insurance policy would fill this family’s need and I hope they have it.

      3. spaceassassin

        “The reason why products exist is due to demand and need.”

        In theory, yes, but just because there is a demand or a “need” for a specific product doesn’t mean it’s a financially sound or reasonable decision to purchase that product. A lot of people spend quite foolishly and emotionally and corporations know that. And when it comes to talking about life insurance, children, death, estate planning, etc. the rational part of the brain tends to be overridden.

        We could argue rationally the returns of other investments vehicles using the over invested dollars against the return of the cash value interest, but I think everyone knows how that math plays out.

        Thinking of putting out $38k/yr for what currently costs me $2k/yr just doesn’t make sense to me. I’d rather use the $36k/year in other vehicles or opportunities that can produce much greater results.

        1. Sure, no problem.

          Given you are against a permanent life policy, what would your solution be for someone who has a term policy up for renewal at 10X or greater the initial premium and wants life insurance for the next 10-30 years? This is the main solution I’m trying to solve for.

          I am hoping that instead of readers just saying something is bad, to offer up some solutions instead.

          Pretend the person also has good cash flow and maxes out all tax-advantageous retirement accounts and has a disabled child.

          What is your life insurance solution to this family?


          1. My solution would be to self insure.

            40 years investing $958 a month “quoted premium” @ 7%= $1983581.00
            @ 8%= $2730135.00
            @ 9%= $3724312.00
            @ 10%= $5050111. 00

            Peace of mind could potentially cost millions of dollars.

            1. A good solution! And something I was at ease with doing before learning about conversion.

              Although, should you not also subtract the potential tax-deferred gains from the cash value as well to get a more truer opportunity cost?

              1. Not necessarily, if you died your family would get the step up value of your account. So basically all your gains would be tax free. However, you would still have to pay the capital gains tax yearly on all dividends received. Even if half your overall gains are due to reinvested dividends at most you would subtract 10 percent off the total to cover taxes over those 40 years.

          2. spaceassassin

            Your article for the general population was minimized to a very particular subset, quickly with the 10X cost and disabled child caveats.

            Even at 10X though it seems like the policy costs might now only be comparable at renewal?

            Also, care for a disabled long-term child changes everything, including life insurance needs. At that point life insurance may become a vehicle for life-long care, in which case, it could be argued that a 20 or 30 year term policy is insufficient as clearly, life-long protection is required, but even then, two 30-yr term policies should cover most people as long as necessary.

            Regardless, I would probably still use the savings and earnings during the first 30 policy, worth $1.5M+ at that point and self insure as someone else mentioned or purchase another term policy if the math still make sense. I think we need a few more numbers and some updated background info about the family financials to provide the appropriate solution.

            ( And you are going to need to restrict the example family even tighter to make permanent life insurance a sound choice. A morbidly obese person with a disabled child will not do it alone, but if the intent is to create some unique conditional family where permanent insurance may be the more sound financial choice, I absolutely believe you could create it with enough what-ifs.)

  14. Hi Sam – are there smart ways to draw out some of the accumulated cash value? For example, can you borrow against the cash (at a very low interest), avoid a taxable event?

    1. Mendel Kibel

      The most important decision in getting insurance, even term, is what is the policy giving to you, how many options, how flexible. You said that with your term, you could only get an universal policy.
      You’re insurance company locked you into that. What if you decided that while life is better, because universal has some serious draw backs which you didn’t discuss, like how easy it is to lapse as you get older, and then you just wasted your money for years, unless you over fund it. What if you wanted a custom universal life, or a whole life, or a custom universal life? What if your policy only allows you to convert certain amounts to permanent, not whatever amount you want to? Too bad, you didn’t have that option.
      The most important decision in getting insurance isn’t cost, it’s the flexibility that your policy provides, and the financial rating and stability of the insurance provider.
      A cheaper term policy might save you more money in the beginning, but in the long run, it costs you more in that you’re locked into whatever the company decides you can get, whether you like it or not, if you can even convert it at all.
      What type of whole life do they offer? What type of riders can you add on? Can you borrow and still make money? Is it a mutual company with dividends or a stock company.
      These are all important questions you need to find out before you get into bed with an insurance company.
      You need to know your options.
      A cheap company also will most likely give you a harder time at payout, if they can even make the payment. Covid-19 messed.over a lot of cheap companies, some messing over the insurance companies financial rating, some with price hikes, some with pulling policies, and some, in desperation, just approving everybody. That’s great now, but when the time comes to payout, they won’t be able to, because they messed over their actuarial tables.
      Listen to the advice of a competent insurance agent. Honest ones won’t push a certain product on you. They will do a fact finder and a needs analysis, and based off of all of the information, they’ll then give guidance.
      If they push a certain product, ask why this is the best decision and how it answers all or most of the needs and goals. If they’re honest, you’ll see why that certain recommendation makes sense for you in your specific situation. Everybody’s needs and goals are different. There’s no one size fits all strategy.
      For some, term makes more sense, for others, a combination of different products makes the most sense.
      Don’t trust yourself to know what you think you need, speak to a professional and make sure their advice is sound.
      Most importantly, get a policy that puts you in the driver’s seat, that gives you the options and abilities to make decisions, without being told that you can only do this or that.
      Mendel Kibel
      Life and health insurance agent
      New York Life

    2. Yes, here are the following ways to use the cash value:

      Boost the Death Benefit
      Choose to leave a larger death benefit to your beneficiaries if you don’t plan to use the cash value for your sell. To do so, just call your life insurance company and say you’re interested in making a change. Because the company doesn’t want to lose your business, it will more than likely accept your request.

      During the trade, your objective should be to completely drain the cash value and transfer the full amount over to the death benefit or the face value. For example, if you have a universal life insurance policy with a $500,000 death benefit and $200,000 in cash value, your goal is to completely empty the cash value and boost the death benefit to $700,000. That’s $200,000 more that will fall into your heirs’ hands instead of going to the life insurance company.

      Pay Life Insurance Premiums
      Once your cash value has grown large enough (paid up), as your insurance company to use the cash value to pay for premium payments.

      Take Out a Loan
      Feel free to take out a loan against your cash value at a low interest rate. If you don’t pay back the loan, your credit score and situation will be fine since it is your cash value. Just know that any money you borrow, plus interest, will be deducted from the death benefit when you die.

      Make A Withdrawal
      If you need more cash for some reason, you can call your insurance company up and make a withdrawal. However, know that with some whole life policies, the withdrawal may reduce the death benefit and sometimes by even greater than the amount you withdraw. Doesn’t seem fair, so you best double check before doing so.

      Full Policy Surrender
      You can always surrender your policy and receive the accrued cash value. But think hard before doing so. If you fully surrender, you’re relinquishing the death benefit when you surrender a life insurance policy, which means your heirs will receive nothing from the policy when you die. In most cases, you’ll also be charged surrender fees, which could greatly reduce your cash value.

      Additionally, the cash you receive through the surrender is subject to income tax. If you have an outstanding loan balance against the policy, you could incur even more taxes.

      Sell Your Policy
      There are companies, usually investment companies, that can buy your cash value life insurance policy. Most of the time, it is the better option when compared to surrender, but the settlement you receive will be less than your death benefit. If the settlement you receive is higher than the sum of premiums you’ve paid, you will also be taxed.

  15. Kurt Huffman

    Good points. However, what do you do later? I’m in the “later” category. Years ago purchase two non-term products now with high cash value. I no longer need the life insurance. I will not be passing down assets. I simply want access to the cash value in the most advantageous manner. Of course, they don’t tell you cashing out carries large tax bill. I’d be better off dying, but I don’t plan to do that soon. Any thoughts on how you will deal with this “later” assuming you’ve separately accumulated enough assets to pass on and by then no longer need the insurance?

    1. Mendel Kibel

      It all depends on the company.
      In theory, if it’s a whole life policy, as long as you leave enough money on the policy to keep it active, the rest you should be able to access tax free.
      If it’s a universal life policy, its trickier. The older you get, the cost of insurance rises, so you need a large cash value to keep it funded. If you take out a large amount, and there isn’t enough to keep if funded, then the policy will lapse, and you’d have to pay regular income tax on all gains.
      Mendel Kibel
      Life and health insurance agent
      New York Life

      1. Mendel Kibel

        please delete that I’m a New York Life agent on my 2 posts, due to compliance regulations.
        Thank you

    2. Hi,
      Depending on how old you are, here are some tax-free exchanges for your two policies that might make sense.
      1. Exchange for an annuity. This will provide passive income.
      2. Exchange for a new life insurance with Long Term Care rider. You can use the death benefit for your LTC.
      3. Depending on what your goals are, you can mix & match combinations.

      To avoid the tax bill, it’s better to take a loan against your policy. If you do, make sure there is enough cash value in the policies so they don’t lapse. If they are no longer active contracts, you could be hit with taxes.

      Hope this helps.

      1. This last point by Wai about taking a loan against your permanent is the strategy I am planning on using. Using this plan, instead of growing cash in the policy as tax deferred you are growing the cash as tax free similar to a ROTH IRA. You must keep enough cash in the policy to keep it from collapsing, the rest is available as a loan. The goal is to die with the largest loan possible. When you die the total amount of the loan is subtracted from the death benefit and your beneficiaries receive the remainder of the death benefit. This will greatly reduce the death benefit but if you die in your 70’s or beyond than your beneficiaries probably have little or no need for the death benefit. I have chosen to go with Whole Life (vs Universal Life) and have picked a limited pay policy. With my policy, I pay in for 10 years and at that point it’s paid for like paying off a mortgage. It will then last the rest of my life.

        1. Can you elaborate on the difference between whole life and universal life?

          Isn’t universal life a type of whole life, which is also known as permanent life?

  16. Do you consider counter party risks for Insurance companies?
    Also, would be interested in how you analyze whether it’s worth getting life insurance, giving your considerably substantial savings to date?

    1. Good question. There is always going to be counter party risk e.g. what if your insurance company goes bankrupt before you die. The “solution” is to get life insurance with the largest carriers with the strongest balance sheets.

      I wrote about my life insurance calculus in the past here

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