If you’re in the market for life insurance, don’t rush to buy expensive permanent insurance policies such as whole life, universal life, or variable life. Instead, consider convertible term coverage. Term insurance is relatively inexpensive and such policies can be converted to permanent insurance if you discover a need for insurance that will stay in force indefinitely.
If you already have permanent insurance and decide you no longer need the coverage, read the fine print before cashing in. Many policies have severe surrender charges in place for 10 years or longer.
Even if surrender charges aren’t an issue, bailing out of a permanent life insurance policy may trigger income taxes. Instead, you can enter into a “1035 exchange,” tax-free, for a low-cost deferred annuity from an issuer such as Schwab, Vanguard, or TIAA-CREF. Subsequently, you can stop paying the premiums or pay a smaller amount. The new contract eventually might be annuitized, providing a partially tax-sheltered stream of income.
