Term Conversion Under a Tight Budget and a Pending Cardiac Workup

Start by separating the two conversion rights. The original-age privilege expired in 2021, so the only remaining right is attained-age conversion to age 65. That right is still valuable because most convertible term contracts do not require new evidence for conversion, but the agent must verify the contract language and any maximum amount that can be converted without underwriting. If conversion is guaranteed, submit it before the angiogram, because a pending cardiac test can cause a new policy to be postponed or declined; if the contract requires evidence above a certain amount, convert the guaranteed portion first and document the timing. Budget math: $18,000 minus the $3,200 term premium leaves about $14,800 per year. At age 59 with diabetes and cardiac history, attained-age permanent premiums will be high, so full $750,000 conversion is unlikely to fit. A reasonable approach is to convert $400,000 to $500,000 of guaranteed universal life and keep the balance as term until 2027, then convert more only if affordable. At least $300,000 must be permanent because the bank collateral assignment cannot rely on term coverage that expires at 65. Do not surrender the whole life policy to raise cash; its $35,000 net value is small relative to the need.

The loan is currently $60,000 against $95,000 cash value, leaving $35,000 of net cash value. The gross death benefit is $250,000, but the beneficiary would receive $250,000 minus the loan and accrued interest, so about $190,000 before interest accrual. At 6%, the loan costs $3,600 per year; if unpaid, it compounds and further reduces the death benefit. Repaying the loan is equivalent to a guaranteed 6% return and restores the full $250,000 death benefit for the special needs trust. However, Marcus has only $90,000 cash, and using $60,000 would leave $30,000 for emergencies and conversion costs. A balanced recommendation is to repay the loan only if the conversion premium is comfortably funded from income; otherwise pay at least the $3,600 annual interest to stop compounding. Do not surrender the policy: with a low basis, surrender could create taxable gain, and it would eliminate permanent coverage. Also confirm the policy is not a modified endowment contract, because that would change loan taxation.

The bank should take a collateral assignment, not ownership. A collateral assignment gives the bank the right to receive only the outstanding loan balance at death, with the remainder payable to the named beneficiary. Marcus can retain ownership and name a properly drafted third-party special needs trust as beneficiary; proceeds then avoid probate and are not treated as an available resource for SSI or Medicaid if the trust is drafted correctly. Do not name the estate, because that exposes proceeds to creditors and probate. If the trust owns the policy, the trustee can manage it if Marcus becomes incapacitated, but the bank must obtain a collateral assignment from the trustee. An irrevocable life insurance trust could remove proceeds from Marcus's estate, but with $450,000 of coverage and an estate below the federal threshold, the cost and three-year lookback may not be justified. Coordinate with the bank and an estate attorney so the assignment, beneficiary designation, and trust language are consistent; the bank should not be named as an outright beneficiary.