Life Insurance Conversion Options: Understanding Your Choices

Life insurance is a crucial financial safety net for your loved ones, and understanding the various options available is essential. One such option is the ability to convert your term life insurance policy into a permanent one. This process, known as a term conversion, allows you to extend your coverage beyond the original term period, ensuring your loved ones' financial protection. It's especially useful if your circumstances have changed, such as developing health issues or gaining new dependents. However, it's important to note that not all term life insurance policies offer this conversion option, and there may be an age limit for when you can make the switch.

What is a conversion option on life insurance?

A conversion option on life insurance allows the policyholder to change their insurance type without needing to take a new medical exam. This is often from a term life insurance policy to a permanent life insurance policy, but can also be from group life insurance to term or whole life insurance.

A conversion option, also known as a conversion privilege, is a provision in a life insurance policy that allows the policyholder to switch to a different form of coverage without needing to take a new medical exam. This means that the policyholder can change their insurance type without needing to provide evidence of insurability.

Term life insurance provides coverage for a specific period, usually 10, 15, 20 or 30 years. It is typically the most affordable form of coverage and does not accumulate cash value.

Permanent life insurance policies do not expire and last for the insured's lifetime, provided that premiums are paid. These policies may offer the potential to build cash value, which can be used for a variety of reasons such as boosting the death benefit or supplementing retirement income.

There are several reasons why someone may want to convert their life insurance policy. These include:

• Their health has changed, and they want to extend their coverage without going through the underwriting process.
• Their income has increased, and they can now afford a permanent policy.
• They want a cash value asset.
• They want to leave an inheritance for their children.
• They want to be able to afford end-of-life costs.

Converting a term life policy to a permanent policy is a simple process and usually does not incur any fees. However, the premium will increase. The steps to convert are as follows:

• Find the conversion deadline in your contract.
• Choose the type of permanent life insurance you want to convert to.
• Calculate the new policy cost.
• Decide whether to do a partial or total conversion.
• Review and sign a new contract.

When can you convert term to whole life or other permanent coverage?

The time at which you can convert term to whole life or other permanent coverage depends on the specific term life insurance policy you have. Some policies allow you to convert at any point during the term of the policy, while others only allow conversions for a specified period of time, for example, the first 5 or 10 years of the policy. Some policies may also impose age restrictions, such as only allowing conversions up to a certain age, for example, 65 or 75 years old.

It's important to carefully review the details of your term life insurance policy, including any fine print, to understand the specific conversion options available to you. If you're unsure, you can also consult a financial advisor or insurance agent for guidance. They can help you understand the terms of your policy and advise you on the best course of action based on your circumstances.

In general, it's recommended to plan ahead and be aware of any conversion deadlines to ensure you don't miss the opportunity to convert your term policy to whole life or other permanent coverage.

How do you convert from term to permanent life insurance?

Converting from term to permanent life insurance is a fairly simple process, but it's important to understand the reasons for doing so and the potential impact on your finances. Here's a detailed guide on how to convert from term to permanent life insurance:

Step 1: Understand the Reasons for Conversion

Before converting, it's essential to evaluate your circumstances and goals. Some common reasons for converting include:

• Change in Health: If your health has deteriorated, converting allows you to extend your coverage without undergoing the underwriting process again. This option can be valuable if your health changes for the worse, as it guarantees coverage despite potential insurability issues.
• Budget Changes: If your budget has changed and you can now afford the higher premiums associated with permanent life insurance, converting can provide lifelong coverage.
• Desire for a Cash Value Asset: Permanent life insurance offers the benefit of building cash value, which can be accessed tax-free during retirement or for other financial needs.
• Leaving a Legacy: Converting can help you leave an inheritance for your children or loved ones without compromising your retirement spending.
• End-of-Life Costs: Converting to permanent life insurance ensures continued death benefit protection, helping your family cover funeral and final expenses.

Step 2: Check Your Policy for Conversion Option

Not all term life insurance policies are convertible. Review your policy documents or consult your financial advisor to confirm if your term life policy includes a conversion option. This step is crucial, as it determines whether conversion is possible.

Step 3: Understand the Conversion Timeline

If your policy does offer a conversion option, identify the conversion period or deadline. Some policies allow conversion at any point during the term, while others have specific time limits, such as the first 5 or 10 years of the policy. Additionally, some insurers may impose age restrictions, such as allowing conversions only until a certain age, like 65 or 75. Knowing the timeline is essential for planning your conversion.

Step 4: Choose the Type of Permanent Life Insurance

There are several types of permanent life insurance, including whole life, universal life, and variable universal life. Each has its pros and cons, and the right choice depends on your financial goals and strategy. Consult a financial advisor to help you select the most suitable type of permanent life insurance for your needs.

Step 5: Calculate the New Policy Cost

While there are usually no direct costs for converting, your premium payments will likely increase. Consider the impact of the higher premiums on your budget, both now and in the future, especially during retirement. You may also choose to convert only a portion of your term policy to permanent coverage to manage costs.

Step 6: Initiate the Conversion Process

Contact your insurance agent or company to begin the conversion process. They will guide you through the necessary steps, which may include filling out a questionnaire. Your new permanent policy should be issued within a few days to a few weeks, depending on the insurer.

Step 7: Finalize the Conversion

Before finalizing the conversion, ensure you understand the details of your new permanent policy, including any restrictions or limitations. Ask your insurance agent about your permanent policy options, conversion costs, and the possibility of converting in stages if needed. Once you are satisfied with the new policy, you can proceed with finalizing the conversion.

What type of permanent life insurance should you choose?

Permanent life insurance policies are typically more expensive than term life insurance policies but offer advantages such as lifelong coverage, a guaranteed minimum death benefit, and the ability to accumulate cash value tax-deferred. When choosing a type of permanent life insurance, it's important to consider your financial goals, budget, and specific needs. Here are the four main types of permanent life insurance:

Whole Life Insurance:

Whole life insurance offers fixed premium payments for the duration of the policy, along with a guaranteed death benefit and guaranteed cash value growth. It provides consistent premiums and the ability to build cash value over time. However, whole life insurance tends to have higher premiums compared to other options.

Universal Life Insurance:

Universal life insurance provides flexibility in varying the amount of premium payments while guaranteeing a minimum death benefit. It offers lower premiums and more flexibility than whole life insurance but may have weaker guarantees and slower cash value growth. Universal life insurance allows you to adjust your premium payments, which can be beneficial if you need to pay for other large expenses.

Indexed Universal Life Insurance:

Indexed universal life insurance is similar to universal life insurance but provides more upside potential. The interest credited to the policy is linked to an external index, such as the S&P 500, which offers the potential for higher returns. However, premiums may be lower than universal life insurance due to the additional downside risk.

Variable Universal Life Insurance:

Variable universal life insurance offers flexible premiums and a savings component, allowing you to choose from various investment subaccounts for potentially greater cash value growth. It provides the greatest upside potential but also carries the most significant downside risk. The cash value is directly tied to the performance of the chosen investments.

When choosing between these options, consider factors such as your budget, the level of risk you are comfortable with, the flexibility you need in premium payments, and the potential for cash value growth. It's important to carefully review the terms, conditions, and limitations of each policy before making a decision. Consulting with a financial professional can also help you make an informed choice that aligns with your specific circumstances and goals.

What are the pros and cons of converting?

Pros of Converting Term Life Insurance to Permanent Life Insurance

• You can extend your life insurance coverage.
• You may not need to redo your medical exam.
• You can transfer wealth to your loved ones, who will receive a death benefit when you die.
• You can access the cash value of your policy for a variety of reasons, such as building a nest egg for retirement, boosting the death benefit, or supplementing retirement income through a policy loan.
• You can avoid underwriting again, which gives insurers a clearer look at your health history and background when determining premiums.
• If your income has increased, you may now be able to afford the higher premiums of a permanent policy.
• You can help your family pay for final expenses, such as funeral costs.
• You can leave an inheritance for your heirs while still having the freedom to spend what you saved for your retirement.
• You can ensure that a portion of your assets will be left to your biological children via a death benefit when you die.
• You can potentially minimize the size of your taxable estate by transferring your life insurance policy to a trust.
• You can accumulate cash value to help meet retirement and other long-term accumulation goals.
• You can provide a basic amount of coverage to pay final expenses, support a surviving spouse, or leave a legacy for surviving family members.
• You can handle sudden expenses, like costs associated with a medical issue or emergency home repair, or longer-term financial challenges, like college tuition or outstanding debt.
• You can avoid paying astronomical rates or even being uninsurable due to a change in health.
• You can convert only the amount of coverage you think you'll need, which can be more affordable in the long term.
• You can help fund a trust for a lifelong financial dependent, such as a child with special needs.
• You can help pay estate taxes that your heirs will owe after your death.

Cons of Converting Term Life Insurance to Permanent Life Insurance

• Permanent life insurance typically costs more in premiums.
• The cash value of your policy may not be as easy to access as your checking account, and you may have to pay fees or taxes when you withdraw it.
• Withdrawing money from your policy will lower the value of your death benefit and may even terminate your coverage.
• The growth rate of your policy's cash value may be lower than other investment strategies.
• Premium payments might not have an end date, making it difficult to keep up with payments if your income frequently changes or becomes unstable.
• You may have to pay a one-time fee to convert your term life insurance policy to a permanent one.
• You may have a lower coverage amount with your new policy.

Frequently asked questions