Life Insurance Conversion: Understanding Policy Transformations

Life insurance conversion is when you change your term life insurance policy into a permanent life insurance policy. This means that you can extend your life insurance coverage, so that it lasts your entire life, rather than a fixed term. This is a common option in the life insurance industry, and many companies allow you to convert without having to undergo a medical exam. Permanent life insurance is more expensive than term insurance, but it also has added benefits, such as building cash value over time.

Converting from term life insurance to permanent life insurance

Permanent life insurance, also called whole life or universal insurance, is an appealing option for many as it builds cash value in addition to providing coverage. However, the price of permanent insurance is usually higher than term insurance. A life insurance conversion allows you to change all or a portion of your term life insurance policy into a permanent life insurance policy.

The best time to convert your term life insurance to permanent life insurance is when your needs change. This could be due to a variety of reasons, including:

• Change in Health: You may have had a change in health and still need coverage. A conversion can help you extend your coverage without going through the underwriting process.
• Budget Increase: Your budget may have increased, and you can now afford the cash value life insurance you initially wanted.
• Dependents: You may be providing for dependents and want to ensure they are covered for the rest of their lives.
• Outstanding Debt: You may have outstanding debt that you want to be covered by life insurance.
• Wealth Transfer: You may want to leave an inheritance for your heirs but want the freedom to spend what you saved for your retirement.
• Estate Planning: Permanent life insurance can be an ideal tool for estate planning, helping to pay for funeral expenses, taxes, and probate fees.

• Check Your Policy: Not all term life insurance policies are convertible. Check your policy documents or contact your insurance company to see if your policy can be converted.
• Find the Conversion Deadline: Determine the term conversion period, which is the timeframe during which you can convert your policy. This is usually specified in your contract.
• Contact Your Insurance Provider: Get in touch with your insurance agent or company to initiate the conversion process.
• Choose the Type of Permanent Life Insurance: Decide what type of permanent life insurance you want to convert to, such as whole life or universal life insurance.
• Calculate the New Policy Cost: The premium payments for permanent life insurance are typically higher than those for term life insurance. Consider your budget and determine if you want to pay the premiums monthly, quarterly, or annually.
• Partial or Total Conversion: Decide whether to do a partial or total conversion of your existing policy. With a partial conversion, you convert only a portion of your term life policy to whole life, resulting in a smaller death benefit and lower premiums.
• Complete the Conversion Process: Work with your insurance provider to fill out the necessary forms and finalize the conversion. You will need to review and sign a new contract.

Converting term to whole life insurance

Converting term life insurance to whole life insurance is a common process in the life insurance industry. Many people opt for term life insurance because it is easy to buy and offers solid financial protection. However, term life insurance is temporary, and once the term is over, the policy expires. On the other hand, whole life insurance, also known as permanent insurance, offers lifelong coverage and builds cash value, but it is more expensive.

A life insurance conversion allows you to change your term life insurance policy into a permanent life insurance policy. This is a helpful option as it lets you extend your coverage without undergoing a medical exam. The conversion process is usually simple: policyholders place a request with their insurance company to convert a portion or all of their term life insurance policy into a permanent life insurance policy.

• You want lifelong coverage: Whole life insurance provides coverage for your entire life, whereas term life insurance only covers you for a fixed period.
• You have outstanding debt: Converting to whole life insurance can help you maintain coverage for your entire life and protect your family financially if you have debt that will continue after your term life policy expires.
• Your health situation has changed: If your health has worsened, converting to whole life insurance may be your best or only option to continue coverage. Most conversion privileges do not require a new medical exam, so you won't be denied coverage based on a change in life expectancy.
• Your budget has changed: If your budget has increased since you first purchased term life insurance, you may now be able to afford the higher premiums of a whole life policy.
• You want a cash value asset: Whole life insurance offers a cash value component that grows with interest over time, which you can use to borrow money or pay premiums.

When considering a conversion, it is important to keep in mind that whole life insurance policies typically have higher premiums than term life insurance policies. Additionally, not all term life insurance policies are convertible, so be sure to check your policy documents or contact your insurance company to understand your options.

Pros and cons of converting term to whole life insurance

Pros of Converting Term to Whole Life Insurance

• Longer-lasting coverage to help you transfer wealth. Your loved ones will receive a death benefit (a financial payout) when you die, no matter when that occurs.
• Consistent premiums. Premium payments are consistent for the duration of your insurance coverage, just like with many term life policies.
• Cash value. Whole life insurance has a cash value that can be used to borrow money in the form of a life insurance loan or to pay your premiums.
• Estate planning. Whole life insurance may offer more possibilities to support your estate plan than term coverage.

Cons of Converting Term to Whole Life Insurance

• Typically higher cost than term life insurance. Whole life insurance premiums may cost more than five times what a term policy costs.
• Premium payments might not have an end date. Some life insurance policies expect payments for as long as coverage lasts, which could be difficult to maintain if your income changes.
• Cash value isn't as easy to access as your checking account. You might pay fees or taxes when accessing the cash value of a whole life policy. Removing money will also lower the value of your death benefit and could even terminate your coverage.
• Lower cash value growth rate. Whole life insurance may have a lower growth rate than other investment strategies.

When to convert term life insurance

• Policy Expiration: Review your current term life insurance policy to understand its expiration date and any conversion options available. Some policies allow conversion only after a certain number of years, while others might have an expiration date for the conversion option, which could be years before your coverage is set to change. It's important to carefully check the dates and not assume that your policy will be convertible at any time.
• Health Changes: If your health has deteriorated and you need coverage for a longer period, converting to permanent life insurance may be a good option. In most cases, you won't need to redo your medical exam, and your new policy will be priced based on the same risk class as your previous term contract. However, be sure to check if there is a maximum age requirement for conversion, as some insurers may not allow conversions after a certain age, such as 65 or 70.
• Budget Changes: If your budget has increased since you first purchased term life insurance, you may now be able to afford the typically higher premiums associated with permanent life insurance. This could be a good time to convert and enjoy the benefits of lifelong coverage and the cash value component that grows over time.
• Dependents and Family Obligations: If your family situation has changed and you are still providing for dependents or have new financial responsibilities, converting to permanent life insurance can help ensure their financial protection. This is especially relevant if you are caring for a family member who will always be financially dependent on you, such as a child with special needs.
• Debt Considerations: If you anticipate having outstanding debt as your term life policy expires, converting to permanent life insurance can help ensure that this debt can be paid off using the death benefit.
• Financial Goals: As you grow older, your financial goals and strategies may change. Converting to permanent life insurance can be part of an updated financial plan, especially if you want coverage for the rest of your life or need additional funds for future needs.
• Business Obligations: If your business continuity plans change and you need to protect business assets and personnel, converting to permanent life insurance can provide long-term coverage to meet these new obligations.
• Legacy Planning: Permanent life insurance can be useful for legacy planning and addressing gaps in your coverage. The cash value component of permanent life insurance can grow over time, providing additional funds for your future needs and supporting your estate planning goals.

Remember, when deciding to convert term life insurance, it's essential to carefully review your policy, understand the conversion deadlines and conditions, and consider your financial situation and life circumstances.

How to convert term life insurance

Before converting term life insurance, it's important to understand the differences between term and permanent life insurance. Term life insurance offers coverage for a fixed period, typically 10 to 30 years, while permanent life insurance provides lifelong coverage as long as premiums are paid. Permanent life insurance also has a cash value component that grows over time and can be a source of financial assistance.

• Check your policy: Not all term life insurance policies are convertible. Review your policy documents or consult your insurance company to determine if your policy includes a conversion privilege or rider.
• Understand the timing: Conversion options usually have an expiration date, which may not coincide with the end of your term policy. Some insurers allow conversions throughout the duration of the contract, while others offer a conversion option only during the first few years of the policy. There may also be a maximum age limit for conversion, such as 65 or 70 years old.
• Choose the type of permanent life insurance: Common types include whole life, universal life, and variable universal life insurance. Each has its pros and cons in terms of coverage, cash value, flexibility, and cost.
• Calculate the new policy cost: Converting term life insurance to permanent life insurance typically doesn't incur a direct cost. However, the premium payments for permanent life insurance are generally higher. Consider the impact on your budget and whether you want to opt for a lower coverage amount to keep premiums more affordable.
• Decide on partial or total conversion: You may have the option to convert only a portion of your term life policy, resulting in a smaller death benefit and lower premiums. Alternatively, you can convert your entire term life policy to permanent life insurance, maintaining the same coverage amount.
• Initiate the conversion process: Contact your insurance company to request the conversion and obtain the necessary forms. They will guide you through the process, including any paperwork and signing a new contract.

Remember to carefully consider your reasons for converting and the potential impact on your financial goals and strategy. While permanent life insurance offers lifelong coverage and a cash value component, it comes with higher premiums. Weigh the pros and cons to make an informed decision.

Frequently asked questions