Term Conversion Life Insurance: Understanding The Basics

Term conversion life insurance is a type of insurance that allows you to convert your term life insurance policy into a permanent life insurance policy. This means that instead of letting your term life insurance policy expire, you can exchange it for a permanent policy without needing a new medical exam. After switching to the permanent policy, you will have a death benefit that lasts your entire life as long as premiums are paid and the contract retains value.

What is term conversion life insurance?

Term conversion life insurance is when you convert your term life insurance policy into a permanent life insurance policy. Term life insurance provides coverage for a specific period, whereas permanent life insurance does not expire as long as premiums are paid.

Most term life insurance policies include a stipulation that allows you to convert some or all of your coverage into a permanent policy within a certain time frame. This is often much easier than purchasing a new policy because the majority of insurance companies let you convert without requiring underwriting again. Underwriting is a process that gives insurers a clearer look at your health history and background when determining your premiums. No new underwriting means that if you have developed health issues since you bought your policy, they won't affect your premiums. However, your premiums will still be affected by your age.

The process of converting your term life insurance policy to a permanent one is fairly simple. First, check your policy to see if you have the option to convert. Then, determine the length of the conversion period. Some companies will allow you to convert at any point during the term of your policy, while others will have a conversion period limit. After that, contact your insurance agent to discuss the details of the conversion. Finally, review and sign a new contract.

There are several reasons why someone might want to convert their term life insurance policy to a permanent one. One reason is that their life insurance coverage is ending and they want to extend their protection. Another reason is that their health has changed, and they need coverage for a longer period of time. Additionally, their income may have increased, and they can now afford the higher premiums of a permanent policy.

When to convert term life insurance

Change in Health:

If your health has declined, converting to a permanent policy can ensure continued coverage without undergoing a new medical exam or underwriting process. This is especially beneficial if your health issues would result in higher premiums or disqualification from a new policy.

Budget Increase:

If your budget has increased since you first purchased term life insurance, you may now be able to afford the higher premiums associated with permanent life insurance policies. This can be an opportunity to upgrade your coverage and enjoy the benefits of a permanent policy.

Need for a Cash Value Asset:

Permanent life insurance policies offer a cash value component that grows over time, tax-free. If you want to access this cash value during retirement or for other financial goals, converting to a permanent policy can provide this benefit.

Leaving a Legacy:

If you want to leave an inheritance for your children or loved ones, converting to a permanent policy can ensure that you have coverage, no matter how far down the road it is needed. This can provide peace of mind and allow you to spend more liberally during retirement while still leaving a financial legacy.

Coverage for Final Expenses:

Converting to a permanent policy can help ensure that your funeral costs and final expenses are covered when you pass away, so your family is not burdened with these financial obligations.

Change in Circumstances:

If your circumstances change and you find yourself still providing for dependents, caring for a family member, or facing unanticipated debt, converting to a permanent policy can provide the extended coverage you need.

It is important to review your term life insurance policy to understand the specific conversion options and time frames available to you. Some policies may offer conversion at any point during the term, while others may have specific conversion windows or age restrictions. Additionally, consider consulting a financial advisor or insurance professional to discuss your specific goals and circumstances to make an informed decision.

How to convert term life insurance

Converting a term life insurance policy to a permanent one is a fairly simple process, but it's important to first establish whether it's the right move for you.

Reasons to convert a term life policy

There are several reasons why you might want to convert your term life insurance to a permanent life insurance 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 a valuable option if your health changes for the worse.
• Budget changes: You might have wanted to buy a permanent policy from the get-go but couldn't afford the higher premium. If you're making more money now, it can make sense to convert if the higher premium on a permanent policy fits within your budget.
• Cash value asset: One of the benefits of a permanent life insurance policy is that part of your premium goes toward the cost of insurance and part of it goes toward building cash value. Some people want cash value life insurance so they can access the cash during retirement (or for other reasons) tax-free.
• Leaving a legacy: If you want to be able to leave an inheritance for your children but don’t want to scrimp during retirement just to ensure there’s cash left to pass on, a term life conversion can help solve that problem.
• Final expenses: Even if you’re not worried about passing on money to your children, you might not want to leave them with the burden of paying for your funeral. So converting enough of a term policy to a permanent policy to cover final expenses could make sense.

Converting a term life policy to a permanent policy is much simpler than applying for a new policy. Here's what you need to do:

• Check the language of your policy to see if conversion is an option (it is on most policies).
• 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. But many will limit the conversion period.
• 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.

Costs of converting

There are no fees to convert a term policy to a permanent policy, but the rate you pay for coverage—your premium—will increase. How much it increases depends on several factors.

• Your age when you convert will affect your rate. The older you are, the higher your premium will be.
• The amount you convert will also impact your premium. You have the option to convert the full value of a term policy or just a portion of it.
• When you convert might also affect your rate. For example, some companies give term life policyholders a credit for the amount they’ve paid toward their policy that can be applied to the cost of a permanent policy if they convert within the first few years of getting a policy.
• The type of permanent policy you choose to convert your term policy to will factor into your premium.

Questions to ask when converting

• What’s your goal in converting?
• What can you afford? You will pay more for a permanent policy. So you need to consider not only whether you can afford the higher premiums now but also in retirement.
• What permanent policies are available? Some companies limit the kinds of permanent policies you can convert your term policy into, so be sure to find out what permanent policies are available to you.
• Can you get a long-term care benefit? You might be considering converting to a permanent policy because some of those policies offer the option to add coverage for long-term care. However, your insurer might offer a long-term care benefit only on a certain type of permanent policy, or not at all.
• Can you get a rising death benefit? Typically, if you want to convert to a permanent policy with a higher death benefit than what your term life policy has, you’d have to go through the underwriting process again. You can get around the underwriting requirement if the insurer offers a permanent policy with a rising death benefit. The premium will be higher, but the value of the policy will rise over time, giving you a bigger death benefit than you originally had.

Alternatives to converting

• Partial conversion: If your insurer allows it, a partial conversion enables you to convert only a portion of your term life policy to whole life — resulting in a death benefit smaller than the original one, with correspondingly lower premiums.
• New term life policy: Purchasing another term life insurance policy could make sense if you only want life insurance coverage for a short amount of additional time rather than for the rest of your life.
• Burial insurance policy: Another option available for those worried about leaving their family with funeral costs is to purchase final expense insurance. This type of life insurance is generally the most affordable and pays for end-of-life expenses.

Pros and cons of converting term life insurance

Pros of Converting Term Life Insurance to Whole Life Insurance

• You gain lifelong coverage.
• Your new whole life policy accrues cash value.
• You avoid undergoing a new underwriting and health exam.
• You can leave a financial legacy 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 your retirement and other long-term accumulation goals.
• You can protect your family from financial burden in the event of your premature death.
• You can protect your family from financial burden in the event of your unexpected death.
• You can maintain your coverage for your entire life.
• You can help your family pay for your final expenses.
• You can have the option to borrow money against the cash value of your policy.
• You can have the option to pay your premiums with the cash value of your policy.
• You can have the option to do a partial conversion.
• You can have the option to convert in stages.
• You can have the option to transfer riders from your term policy to your new policy.

Cons of Converting Term Life Insurance to Whole Life Insurance

• Your new premiums may be higher.
• You may have a lower coverage amount.
• You may have to pay a one-time fee.
• You may have to pay higher premiums for the same coverage amounts.
• You may not need life insurance (term or permanent) if your resources are sufficient.
• You may not be able to keep pace with the higher premium payments of a permanent life policy.
• You may not be able to convert your entire term policy.
• You may have to pay surrender charges during the first few years of the policy.
• You may have limited policy options.
• You must convert during the conversion period.

Permanent life insurance explained

Permanent life insurance is a type of insurance that provides coverage for the full lifetime of the insured person. Unlike term life insurance, permanent life insurance does not expire after a certain period of time. It is designed to financially protect your loved ones in the event that you pass away.

Permanent life insurance combines a death benefit with a savings component that earns interest on a tax-deferred basis. This means that the cash value for permanent life insurance policies grows tax-free, and policyholders do not pay taxes on any earnings as long as the policy remains active. Policyholders can access this cash value for various reasons, such as building a retirement fund, increasing the death benefit, or supplementing retirement income through a policy loan.

The two primary types of permanent life insurance are whole life and universal life. The cash value of whole life insurance grows at a guaranteed rate, whereas universal life insurance features more flexible premium options and its earnings are based on market interest rates. Variable life and variable universal life provide expanded options to invest the cash value in mutual funds and other financial instruments.

Permanent life insurance policies have much higher premiums than term life insurance policies, which lack a savings component. However, permanent life insurance may be appealing to those who want ongoing coverage and the opportunity to save. It is also a good option for those who want to ensure a death benefit payout for their loved ones, regardless of when they die.

Frequently asked questions