Term Life Conversion | Essential How-To Guide + Alternatives

As your term life insurance policy nears its expiry date, you will want to explore your coverage options – including whether your policy includes a conversion privilege.

Financial needs and goals change, and it’s a good idea to have your life insurance policy reflect your current obligations.

For example, many term policyholders:

• Now need lifetime coverage
• Have dependents that still require financial protection
• Want to leave a financial gift to loved ones or a charity

Fortunately, most term policies are convertible.

Here, you will find everything you need to know about converting term life insurance to permanent life insurance.

We’ll cover important details on the conversion process, how to determine if converting your policy makes sense, and alternatives to consider.

What Is Term Life Insurance Conversion?

Term life insurance conversion occurs when you take an existing term policy and transition it into a permanent policy.

More specifically, term life insurance – coverage that lasts for a specific period of time, is switched to permanent life insurance – coverage that lasts your whole life.

Called a conversion privilege, the option often comes in the form of a rider to the life insurance contract.

Reasons To Convert Your Term Policy

There are plenty of instances in which it makes sense to convert your term policy.

Current Health Issues

A primary reason to convert an existing term life insurance policy is if your insurability is in jeopardy.

If, since your initial policy’s issuance, serious health complications have occurred, it’s possible that you do not qualify for traditional life insurance anymore.

For example, the following health conditions often impact your ability to buy a new term life insurance policy:

• Cancer
• Heart disease
• Autoimmune condition
• Stroke
• Diabetes
• Obesity

Lifelong Protection

Permanent life insurance is just that – unending.

Your beneficiaries receive a death benefit, regardless of when you pass away.

Note – you must be up-to-date on your premium payments.

If your loved ones will depend on you financially for an indefinite period of time, permanent coverage provides peace of mind.

Or, a charitable institution or non-profit organization may be the recipient of the policy’s proceeds. Permanent life insurance is often an ideal, tax-advantaged vehicle to accomplish a charitable giving goal.

Cash Value

Unique to permanent life insurance, cash value accumulates money that is separate from the death benefit.

After the cost of insurance and policy fees are paid, the remaining premium payment amount is placed in an interest-earning cash value account.

Depending on your needs and goals, the cash value account of life insurance is advantageous, particularly because the funds may be accessed via policy loans or withdrawals.

• Policy loan – a loan issued by the life insurance carrier with the cash value of the policy used as collateral
• Policy withdrawal – the ability to withdraw cash from your policy, within limits

Your Budget

It may be that your budget has increased over the years and a permanent policy’s cost makes sense now – when it didn’t before.

You will need to have additional funds available for premium payments if you opt to convert your policy.

Why? Permanent coverage, generally-speaking, costs between 5 – 15 more than term coverage.

Types Of Permanent Life Insurance

Depending on the carrier your term life insurance policy is through, you will have different forms of permanent life insurance to choose from to complete a conversion.

Familiarize yourself with the most common forms.

Note – almost every form of permanent life insurance includes a cash value component. Policy loans and withdrawals are typically available.

Whole Life Insurance

Traditional whole life insurance is the most common type of permanent coverage for term policy conversion.

Whole life insurance key features:

• Guaranteed death benefit to beneficiaries
• Fixed premiums (level)

Universal Life Insurance

Popular and affordable, Universal life insurance (UL) is a form of permanent coverage.

Universal life insurance key features:

• Flexible premium payments
• Death benefit can be increased or decreased, depending on the policy

Indexed Universal Life Insurance

Another form of permanent coverage, indexed universal life insurance (IUL) includes cash value that is affected by – but not directly exposed to – the stock market.

Indexed universal life insurance key features:

• Flexible premium payments
• Death benefit is adjustable
• Cash value includes indices that are influenced by the stock market performance – not directly linked to the stock market
• Caps and floors of the cash value account protect the policy owner and carrier

Variable Universal Life Insurance

Not commonly used in life insurance conversions, variable universal life insurance (VUL) allows the policy owner to take on more risk through the stock market – for the possibility of substantial cash value growth.

Variable universal life insurance key features:

• Flexible premium payments
• Death benefit is adjustable
• Cash value account is directly invested in the stock market

Stipulations to Term Life Insurance Conversions

You will want to read the fine print of your life insurance policy to understand the rules and stipulations regarding your conversion clause.

Most term life insurance policies include a free conversion option. However, you need to read the fine print.

The following are common stipulations to term conversions:

• Time period during which a conversion is allowed
  • For example – first 5 policy years, 10 years, 20 years, or at any point during the life of the policy
• Type of policy you may switch to
  • The form of coverage you may convert to (e.g. traditional whole life) varies among carriers
• Face amount
  • You may only be able to convert a certain amount of your policy
• Your age
  • Your new premiums will be based on your age at the time of conversion – an advanced age may make the new policy cost-prohibitive

Cost

Be sure to consider cost during your evaluation of whether or not to convert your policy.

Your premiums will almost always increase.

Why? Permanent coverage costs significantly more than term coverage. Generally speaking, a permanent policy costs about 5 – 15 times more in premiums than a term policy for the same face amount.

Further, your premiums are re-calculated for your age at the time of conversion (but not health factors). In other words, the older you are, the costlier your premiums will be.

Consider an example.

At the age of 30, a person in good health secures a 20-year term life insurance policy for $500,000.

• Monthly premium male: $21.88
• Monthly premium female: $19.69

As they turn 45, it is determined that their coverage needs are indefinite and they convert a portion, say $100,000, of the policy into a traditional whole life policy.

• Monthly premium male: $164.41
• Monthly premium female: $143.50

Conversion Credits

To offset cost, many carriers offer what are called, conversion credits.

What are they? Conversion credits reduce your premium payments for a certain period of time.

For instance, when you convert your term policy to a permanent policy, your life insurance company may lower your premium payments for the first year.

Keep in mind, however, conversion credits are temporary and your premiums will eventually increase.

Steps to Convert Your Term Policy

The process to convert a policy is simpler than the process to buy a new policy.

Usually, you will need to fill out basic paperwork.

1. Verify the fine print of your term life insurance policy to understand your options
2. Complete application for term life conversion
3. Select face amount for the permanent policy
4. Assign beneficiaries (they may have changed since you purchased your term policy – divorce, death, birth of a child, etc)
5. Submit your application

Other Options

Be sure to assess all of your coverage options before moving forward with a conversion.

Buy a New Term Policy

It may be in your best interest to purchase a new term life insurance policy.

For example, the following circumstances lend themselves towards term, instead of permanent:

• You are younger – age is a major cost factor for life insurance
• No major health complications – you can still qualify for term coverage
• Permanent coverage is not necessary – you have no need for indefinite protection

Keep in mind you can also get term life insurance with no exam required. 

Stack Life Insurance Policies

If the conversion clause of your term policy does not fit your needs, and you do not qualify for traditional coverage any longer, consider stacking life insurance policies.

What does it mean to stack life insurance?

While different forms of coverage are stackable, often, an individual purchases multiple final expense or guaranteed issue policies.

Guaranteed issue and final expense life insurance only offer modest face amounts, making it necessary to buy more than one policy.

If you have current health complications, know that final expense only has minimal underwriting and everyone qualifies for guaranteed issue coverage.

At the end of the day, your needs and insurability will determine your best life insurance option.

Frequently Asked Questions

Frequently asked questions about term life conversion and their important answers.

How much does a term policy conversion cost?

The conversion process is free.

You do, however, need to budget for the increase in premium payments.

Permanent coverage will cost anywhere between 5 – 15 times more in premiums than a term policy for the same amount.

Can you convert a part of your term policy?

Yes. This happens all the time.

Often, policy owners will opt to convert a portion of their term policy to keep premium payments to a reasonable amount.

For example, an affordable term policy for $1 million is likely cost-prohibitive as a permanent product. You may opt to convert $100,000 of the policy into whole life insurance.

What happens at the end of your term policy?

Your life insurance protection ends.

The premiums you paid remain with the life insurance company.

Next Steps

First, determine the specifics of your term life insurance policy’s conversion privilege.

• Is the policy currently convertible?
• What type of permanent products can it convert into?

Next, compare the conversion options with your needs and budget.

• Do you need permanent coverage?
• What is your budget for life insurance?
• How much financial protection do your dependents require?
• Is there a particular charity you would like to leave a financial gift?

Finally, collaborate with an independent life insurance agent to decide what is best for you.

Unlike a captive agent, they will access multiple products and carriers on your behalf. That way, you can clearly determine if a term conversion is in your best interest.