Unraveling The Mystery Of Converting Term Life Insurance Policies

Converting term life insurance to permanent life insurance is a process where individuals can switch their temporary life insurance policy to a lifelong one. This is usually done when the policyholder's financial situation changes, and they want to extend their coverage without going through the underwriting process again. Most term life insurance policies offer this conversion privilege, allowing the insured to switch policies without a physical examination, and guaranteeing coverage and set premium payments for a certain number of years. The conversion is much simpler than applying for a new policy, but it does result in higher premiums.

Converting term life insurance to permanent life insurance

Term life insurance is a policy that covers a certain period, usually 10 to 30 years. It is less expensive than permanent life insurance because you will likely outlive the term. Permanent life insurance, on the other hand, covers you for your entire life, regardless of how long that is.

Most term life insurance policies can be converted to permanent life insurance, usually whole life insurance, and this is an option that many policyholders are unaware of. A convertible term life insurance policy allows you to change your temporary coverage to a permanent one without needing a new medical examination.

Benefits of Converting to Permanent Life Insurance

You want to earn cash value with permanent life

Permanent life insurance policies allow you to withdraw money while you're alive, providing an emergency savings source. The money in your account grows on a tax-deferred basis, meaning you don't pay taxes until withdrawal.

You still need coverage at the end of your term life policy

If you only need coverage for a specific period, term life is a great choice. However, if you're reaching the end of the term and need coverage for much longer, converting to permanent life insurance is a good option.

You're financially better off than when you bought your term life policy

Permanent life insurance is more expensive, and some people can't afford it when they're starting out. However, as you age, your financial situation may improve, making it a good time to convert to a permanent life policy.

You have health issues

When you convert from a term life to a whole life policy, you may not need to undergo a new medical exam. The insurance company will likely give you the same health rating as your original term life policy.

You have dependents who may need financial help after you die

If you have dependents who will need financial support for many years after your death, converting to permanent life insurance can ensure that money is left behind for their care.

Premiums remain the same for the rest of your life

Permanent life insurance locks in rates, so you don't have to worry about rate increases. However, you will likely pay more in premiums for a permanent life policy than a term life policy.

Considerations Before Converting

Higher premiums

Whole life insurance premiums are significantly higher than term life premiums. When you convert, you will pay higher premiums as you have aged.

Complexity

Whole life policies can be more complex, with components like cash value and dividends that might be difficult to understand.

Lower death benefit for the same premium

For the same premium amount, the death benefit in a whole life policy may be lower compared to a term life policy.

Investment returns may vary

The growth of the cash value depends on the policy's terms and market conditions, which can vary.

How to Convert Term Life Insurance to Permanent Life Insurance

First, check if your term life insurance policy is convertible by reviewing the language in your original policy or contacting your insurance agent or company. Then, confirm that you are within the term conversion period, which is usually before the term ends or before you turn 70. Finally, fill out the conversion forms with your insurer; you won't need to go through the application process again or take a medical exam.

Benefits of convertible insurance policies

Convertible insurance policies allow you to convert a term policy to a permanent policy. This means that you can switch from a temporary plan to a lifelong one without having to undergo a new health screening process. This is especially beneficial if your health has declined since you started the term policy, as you may not qualify for a permanent policy otherwise.

No New Medical Screening

The option to convert your term policy to a permanent one without a new medical screening is the biggest benefit of convertible insurance policies. This means that your health rating will be the same as when you first signed up for coverage, even if your health has deteriorated. This gives you peace of mind that you will be able to obtain permanent coverage in the future, regardless of any changes to your health.

Flexibility

Convertible insurance policies offer greater flexibility compared to other life insurance options. You can choose which type of permanent life insurance you want to convert your policy to, and you can also choose to convert only a certain amount of your coverage, keeping the rest under a term policy that you can renew. This flexibility allows you to customise your coverage to meet your specific needs and budget.

Extended Coverage

Convertible insurance policies allow you to extend your coverage beyond the set number of years offered by term life insurance policies. Permanent life insurance policies never expire as long as you continue to pay the premiums, providing you with lifelong protection. This is especially useful if you have long-term obligations, such as to a spouse or children, and want to ensure they are always protected.

Cash Value Accumulation

Permanent life insurance policies, such as whole life insurance, offer cash value accumulation. This means that cash value builds up within the policy over time, growing tax-deferred. You can access this cash value to help with major expenses or to increase the amount your beneficiaries will receive. Additionally, whole life policy owners may be eligible to receive dividends, providing even more financial benefits.

Lock in Lower Premiums

Converting your term policy to a permanent one can help you lock in lower premiums. Term life insurance premiums tend to increase substantially when it's time to renew, but by converting to a permanent policy, you can avoid these increases and lock in a lower rate. This can save you money in the long run, especially if you convert at a younger age.

Drawbacks of converting term life insurance

While converting term life insurance to permanent life insurance has its benefits, there are some drawbacks to consider. Here are some reasons why converting term life insurance may not be the best option for everyone:

• Limited choice of policies: One of the drawbacks of converting term life insurance is the limited choice of policies available. You may be restricted to the permanent life insurance products offered by your existing insurance provider. Shopping around for a new policy could provide more options and potentially better rates or benefits.
• Higher premiums: Converting to a permanent life insurance policy will result in higher premiums. Permanent life insurance policies are generally much more expensive than term life insurance. The increase in premiums can be significant, ranging from three to ten times higher than the original term policy. This can be a financial burden, especially if your income has not increased proportionally.
• Age impact on premiums: While your current health conditions may be disregarded during the conversion, your age will definitely be a factor in determining the new premium. The older you are, the higher your premium will be. This can lead to "sticker shock" when compared to the premiums you were paying for term life insurance.
• Limited death benefit: Increasing the death benefit of the converted policy is usually not an option. You are typically restricted to converting the term policy to a permanent policy with the same or a lower death benefit. If you require a higher death benefit, purchasing a new policy may be a better option.
• Cash value accessibility: Permanent life insurance policies accumulate cash value over time, which can be accessed tax-free. However, withdrawing money from the cash value of the policy may incur fees or taxes. Additionally, withdrawing too much money can reduce the death benefit or even terminate the coverage entirely. The cash value may also have a lower growth rate compared to other investment options.
• Conversion deadline: Not all term life insurance policies are convertible, and for those that are, there is usually a conversion deadline. Some policies may allow conversion at any point during the term, while others restrict it to a specific period, such as the first 5 or 10 years. Missing the conversion deadline could result in losing the option to convert.
• Limited to specific circumstances: Converting term life insurance may not always be necessary or beneficial. If your financial obligations have been met and your family is no longer financially dependent on you, the additional coverage provided by a permanent policy may not be required. In such cases, sticking with term life insurance or even letting the policy expire could be more cost-effective.

How to convert term life insurance

Converting a term life insurance policy to a permanent one can be a straightforward process, but it's important to understand the implications and whether it's the right decision for your circumstances. Here's a step-by-step guide on how to convert term life insurance to permanent life insurance.

Step 1: Check Your Policy

First, check your existing term life insurance policy to see if it includes a conversion option. Not all term life insurance policies are convertible, so this is an essential first step. Look for a term conversion rider or a conversion clause in your policy documents. This will outline the specific conditions and timeframe for converting your policy. There may be a deadline for conversion, often before the end of your term, or a maximum age limit.

Step 2: Understand the Implications

Converting to a permanent life insurance policy will result in higher premiums. The exact amount will depend on several factors, including your age, the amount of coverage, and the type of permanent policy you choose. Additionally, consider whether you want to convert your entire term policy or only a portion of it. A partial conversion can result in lower premiums but will leave you with two policies to manage.

Step 3: Choose the Type of Permanent Policy

There are several types of permanent life insurance policies, including whole life, universal life, and variable universal life. Each has its own pros and cons in terms of coverage, cash value accumulation, flexibility, and cost. Choose the type of permanent policy that best aligns with your financial goals and needs.

Step 4: Contact Your Insurance Provider

Reach out to your insurance provider to initiate the conversion process. They will guide you through the specific steps, which may include filling out an application, choosing coverage amounts, and selecting billing options. Some providers may charge a fee for the conversion, so be sure to clarify all costs involved.

Step 5: Complete the Conversion

Work with your insurance provider to finalize the conversion of your term policy to a permanent one. This may involve reviewing and signing a new contract. Remember to cancel your previous term policy if you have opted for a full conversion to avoid duplicate coverage.

Reasons to convert term life insurance

Term life insurance is a type of insurance that covers you for a specific period, usually 10 to 30 years. It is often chosen because it is more affordable than permanent life insurance. However, there are several reasons why you may want to convert your term life insurance to permanent life insurance.

Your circumstances have changed

If your circumstances have changed since you took out your term life insurance, you may now require lifelong coverage. For example, if you have a lifelong financial dependent, such as a child with special needs, you may want to convert to permanent life insurance to ensure they are provided for after your death.

Similarly, if you have developed health issues since taking out your term life insurance, you may want to convert to permanent life insurance. This is because, when you convert, the insurance company will likely give you the same health rating as your term life policy, even if your health has deteriorated.

You want to build cash value

Permanent life insurance policies build cash value over time, whereas term life insurance policies do not. This means that, with permanent life insurance, you can withdraw money while you are still alive, and you can leave a larger sum of money to your beneficiaries when you die.

You want to cover final expenses

Even if you do not have dependents, you may want to convert to permanent life insurance to ensure that your family does not have to pay for your funeral expenses when you die.

You can now afford it

Permanent life insurance policies tend to be more expensive than term life insurance policies. Therefore, if your income has increased since you took out term life insurance, you may now be able to afford to convert to permanent life insurance.

You want to leave a legacy

If you want to be able to leave an inheritance for your children but do not want to scrimp during retirement, converting to permanent life insurance can help. This is because permanent life insurance will be in force no matter when you die and will pay a death benefit to your beneficiaries.

Frequently asked questions