Gulp To Term Life Insurance: Converting Your Policy

Group term life insurance is a common employee benefit, often provided by employers at no cost. It covers not just the policyholder but their co-workers as well. However, the coverage is linked to employment, and once an individual's employment is terminated, the insurance coverage automatically ends. In some cases, insurance companies offer the option to continue coverage by converting to an individual permanent life insurance policy. This is known as a term-to-perm conversion.

A term-to-permanent life insurance conversion allows individuals to extend their life insurance coverage by changing their death benefit to permanent. This means that instead of letting their term life insurance policy expire, they can exchange it for a permanent policy without needing a new medical exam. After switching to the permanent policy, the policyholder will have a death benefit that lasts their entire life as long as premiums are paid and the contract retains value.

Not all term life insurance is convertible, and there may be certain limitations and requirements that apply to the conversion. For instance, there may be a maximum age requirement, and the conversion might only be available during the first few years that the life insurance is active. Additionally, the premium payments for the new permanent policy will likely be higher.

Converting group life insurance to permanent life insurance

Group life insurance is a common employee benefit, often provided by employers at no cost. It covers not just the policyholder but their co-workers as well. However, group life insurance is linked to ongoing employment, meaning that coverage ends when an individual's employment terminates.

Some insurance companies do offer the option to continue coverage by converting to an individual permanent life insurance policy. This is known as a "conversion privilege". A conversion privilege allows an employee under a group plan to convert their plan to an individual life insurance policy without going through another approval process or a medical exam.

How to Convert Group Life Insurance to Permanent Life Insurance

To convert group life insurance to permanent life insurance, follow these steps:

• Find your conversion deadline: Plan ahead and pay attention to the dates allowed for conversion in your contract.
• Choose the type of permanent life insurance: There are several types of permanent life insurance, including whole life insurance, universal life insurance, and variable universal life insurance. Each type has its own pros and cons, so be sure to choose the one that best aligns with your financial goals and strategy.
• Calculate the new policy cost: There is usually no direct cost to convert term life insurance to a permanent policy, but premium payments will likely be higher. Consider choosing a lower coverage amount if you want to keep premium amounts lower.
• Convert: Decide whether to do a partial or total conversion of your existing policy. You will need to review and sign a new contract.

Considerations for Converting Group Life Insurance to Permanent Life Insurance

When considering converting group life insurance to permanent life insurance, keep the following in mind:

• Higher premiums: Permanent life insurance premiums are typically much higher than term life insurance premiums.
• Age is a factor: Your age when you convert will affect your premium. The older you are, the higher your premium will be.
• Limited policy options: The permanent life insurance policies available for conversion may be limited by your insurer. For example, you may only be able to convert to a universal life policy.
• Conversion deadline: There is usually a conversion deadline after which you will no longer be able to convert your group life insurance to a permanent policy.
• Partial conversion: You may have the option to do a partial conversion, where you only convert a portion of your group life insurance to permanent coverage. This can help keep costs down, as you will have both a term policy and a permanent policy active at the same time.

Conversion privilege

In the context of life insurance, conversion privilege enables a policyholder to convert their current policy to another type of policy without undergoing a medical examination or completing a new application. This means that the policyholder can maintain coverage even if their health has deteriorated, as their insurer is required to renew or update the policy. This is particularly relevant for term life insurance, which provides coverage for a specific period or number of years, after which the policy expires or can be renewed at a higher premium.

To take advantage of the conversion privilege, the insured must adhere to the terms specified in the provision, including strict timelines. Failure to comply with these requirements can result in the loss of life insurance coverage. Additionally, the conversion privilege may have an expiration date, after which the policyholder can no longer convert to a permanent policy.

Reasons to convert a term life policy

Converting a term life insurance policy to a permanent one is much simpler than applying for a new policy. However, deciding whether it's the right move can be challenging. Here are some reasons why you might want to convert a term life policy:

Change in Health

Converting a term life insurance policy to a permanent one allows you to extend your coverage without going through the underwriting process. This can be valuable if your health deteriorates. If you wanted to get a new term life policy to extend your coverage, you would have to pay astronomical rates or could even become uninsurable. However, if you convert, your current health won't affect the premium on a permanent policy or your insurability.

Budget Increase

You may have wanted to buy a permanent policy initially but couldn't afford the higher premium. If your income has increased, converting to a permanent policy with a higher premium that fits your budget may be a good idea.

Cash Value Asset

Permanent life insurance policies have a cash value component, meaning part of your premium goes towards the cost of insurance, while the other part goes towards building cash value. This feature allows you to access cash during retirement or for other reasons, tax-free. It's important to note that this shouldn't replace retirement savings in an account like a 401(k) but can be part of a comprehensive financial plan.

Leaving a Legacy

If you want to leave an inheritance for your children but don't want to compromise your retirement spending, converting to a permanent policy can help. A permanent policy will remain in force regardless of when you die and will provide a death benefit to your beneficiaries.

Final Expenses

Even if you're not concerned about leaving money to your children, you might not want them to bear the financial burden of your funeral expenses. Converting a portion of your term policy to a permanent policy can help cover these final expenses.

Lifelong Dependent

If you have a lifelong dependent, such as a child with special needs or an elderly parent who relies on you financially, permanent life insurance can provide proceeds to ensure their continued care.

Estate Planning

Permanent life insurance can be a valuable tool for estate planning. It can help pay for funeral expenses, taxes, and probate fees after your death. Additionally, it can assist in managing the estate taxes your heirs will owe. By setting up an irrevocable life insurance trust with the help of an estate planning attorney, you can ensure that the death benefit is not subject to estate taxes.

How to convert term life to permanent life

Converting a term life insurance policy to a permanent one is much simpler than applying for a new policy. Here is a step-by-step guide on how to convert term life to permanent life insurance:

Step 1: Check your policy

First, check the language of your policy to see if conversion is an option. Some policies come with a built-in conversion provision, while others require you to purchase a rider to make them convertible. If you haven't purchased a term life insurance policy yet, consider inquiring about a term conversion rider before moving forward.

Step 2: Check the term conversion period

Check the term conversion period—the time frame during which you can convert. Some companies will allow policyholders to convert at any point during the term of their policy. However, many will limit the conversion period. For example, the conversion period on a 20-year term policy might be limited to the first 10 years the policy is in force.

Step 3: Contact your insurance agent or company

Contact your insurance agent or company to ask to convert your policy. You won't have to take a life insurance medical exam or go through the underwriting process. You'll simply fill out a questionnaire, and your new permanent policy will be issued within a few days.

Step 4: Compare the cost of converting

There are no fees to convert a term policy to a permanent policy. However, the rate you pay for coverage—your premium—will increase. How much it increases depends on several factors, including your age, the amount you convert, and the type of permanent policy you choose.

Step 5: Ask yourself some questions

Before you convert a term policy, there are several questions you should ask yourself and your life insurance agent or company. For example, what's your goal in converting? What can you afford? And what permanent policies are available?

Pros and cons of converting term life to whole life

Converting term life insurance to whole life insurance has its advantages and disadvantages. Here are some pros and cons to help you make an informed decision:

Pros of Converting to Whole Life Insurance:

• Long-term peace of mind: Whole life insurance provides permanent coverage for as long as you pay the premiums. It ensures that your loved ones will be protected financially, even if something unexpected happens to you.
• No medical exam required: Converting your term policy to whole life insurance usually does not require a new medical exam. This is especially beneficial if your health has deteriorated since purchasing the term policy, as it guarantees continued coverage without the risk of being denied or facing higher premiums due to health issues.
• Accumulation of cash value: Whole life insurance policies allow a portion of the premiums to accumulate as cash value, which grows tax-deferred. This cash value can be borrowed against or withdrawn for major expenses, providing additional financial flexibility.
• Guaranteed death benefit: Whole life insurance guarantees a death benefit to your beneficiaries as long as the policy is maintained. This is in contrast to term life insurance, which only provides a benefit if the insured person dies within the specified term.
• Estate planning: Whole life insurance can assist in estate planning by helping to cover estate taxes that your heirs may owe after your death. It can also be used to leave a financial legacy for your children or grandchildren.

Cons of Converting to Whole Life Insurance:

• Higher premiums: Whole life insurance premiums are typically much higher than term life insurance. This is because whole life insurance provides coverage for a longer period and includes a cash value component. Ensure that you can afford the higher premiums, especially in retirement, as failure to pay premiums may result in policy lapse.
• Limited conversion window: Most term life policies have specific deadlines or age restrictions for converting to whole life insurance. If you miss this window of opportunity, you may lose the ability to convert your policy.
• May not be necessary: If your financial situation and goals remain stable, and you only need coverage for a specific period, sticking with term life insurance may be more cost-effective. Whole life insurance is often recommended for those with lifelong dependents or those seeking to build cash value through their insurance policy.
• Potential tax implications: While the cash value of whole life insurance policies can be accessed tax-free, using the cash value increases the likelihood of policy lapse, which could result in a tax liability.
• Limited policy options: Some insurers may only offer a single option for conversion, such as a universal life insurance policy, rather than a whole life policy. It is important to review the available permanent life insurance policies before committing to a conversion.

Frequently asked questions