Purchasing life insurance coverage is often low on the financial planning priority list for individuals who are young and healthy. The need to have assets set aside to cover final expenses, debts or income replacement for a spouse and dependents is hardly a pressing thought when health concerns and thoughts regarding the reality of mortality are not present; however, the cost of waiting to secure life insurance coverage can be insurmountable should something unexpected happen. Regardless of the type or amount of life insurance coverage purchased, there are compelling reasons to have coverage sooner rather than later.
Ease of Qualifying
The majority of term and permanent life insurance policies require a degree of medical underwriting, which often includes the completion of a truncated medical exam and questions regarding personal medical history and family health history. An individual who has had past medical issues will face difficulties in qualifying for a new life insurance policy as the insurance carrier will view him as a higher risk. Additionally, an older individual may not be eligible for coverage after a certain age, regardless of his health profile. Applying for life insurance coverage when health and age are of no concern allows an individual to qualify without the risk of being declined from an underwriting perspective.
Life insurance coverage is based on the current age and health of the proposed insured. Insurance companies price life insurance coverage more favorably for individuals who are young and relatively healthy compared to individuals who are older and more susceptible to medical issues. For example, $500,000 of 30-year term life insurance coverage for a man at age 30 costs, on average, $34.54 each month. The same amount of coverage for a man at age 55 costs an average of $265.91 each month. Permanent insurance policy premiums can have even greater swings in cost based on age, as these policies are designed to last for the duration of one's life, unlike term policies. Cost savings represent a substantial benefit of securing life insurance coverage earlier in life.
Covering Future Expenses
The majority of young, healthy individuals are not actively thinking about ways to cover future expenses because those expenses may not yet exist; however, it is easy to cover final expenses, spousal income replacement, dependent care expenses and debt coverage with life insurance well before the need for coverage is apparent. Because life insurance death benefits are tax-free to beneficiaries, a policyholder has the opportunity to establish a financial safety net to cover future expenses fully at a much lower cost based on age and health.
An individual who secures term life insurance coverage earlier in life often has the option to convert a portion of the policy to permanent coverage down the road. A life insurance conversion allows the insured to transition some or all of a term insurance policy into a permanent policy at the same health rating assigned at the time the original policy was issued. For example, an individual who has a $500,000 term policy can choose to convert $100,000 to a permanent policy, leaving him with the same amount of total coverage. The permanent insurance is still in place after the term expires, which is beneficial in estate planning and long-term financial planning strategies.
Because conversion of a term policy does not generally require medical underwriting, an individual avoids the risk of receiving a lower health rating based on current medical conditions and, therefore, higher premiums. Instead of undergoing a new medical exam and filling out a new health questionnaire, the insured simply completes a short application for conversion with the insurance carrier. The premium for the term insurance coverage is reduced based on the lower death benefit amount, while the premium for the new permanent coverage is based on the initial health rating and the current age of the insured. Conversion provisions within a term policy can be an incredibly valuable tool for an individual who is in need of long-term insurance coverage but may not qualify for a favorable health rating.