Converting Term to Whole Life Insurance

What Does Converting Term Life to Whole Life Mean?

Converting from term life insurance to a whole life policy means switching from a limited period of coverage to coverage that lasts your entire life. This is accomplished through a conversion rider that allows changes in your existing policy, so your policy stays with the same insurer.

In most cases, you get lifetime coverage without any new medical examination, underwriting, or detailed documentation. Not all policies have a conversion feature, and some carriers limit conversion to a certain age, like 65 or 70.

Term Life vs Whole Life

Before opting the conversion, it’s a good idea to understand the differences between term life and whole life to help decide if you are making the right choice.

When Can You Convert a Term Policy?

Whether and when you can convert your term policy to permanent coverage depends on insurer-specific terms and conditions. Here’s a general idea of when it may be allowed:

• Many insurers allow policy conversion during the level term period, meaning the duration when your premiums remain fixed. After this period, your policy moves into the renewal phase, and conversion options may be restricted or even unavailable.
• Some insurers may limit conversion only during the first 5, 7, or 10 years of the policy. It’s good to check the policy document to know if such a clause exists.
• Insurers may also limit the conversion based on maximum conversion age, often ranging between 65 and 70.

Remember, after the term ends, conversion options are usually unavailable. Also, renewable costs may be higher. It's good to know the limits and timing of your policy’s conversion window so that you don’t lose the benefit of guaranteed coverage without a medical exam.

How Converting Term Life to Whole Life Works (Step-by-Step)

If you think you might benefit from converting your term life to a whole life insurance policy, here’s how it typically works:

• Check Conversion Eligibility: To begin with, check if your term policy includes a conversion option. While most policies offer it, some don’t. If your policy is convertible, be sure to check all the applicable clauses, including when and how much you can convert.
• Choose Permanent Policy Type: Review your policy documents to know available options. Choose which type of permanent policy you want to switch to.
• Select Coverage Amount: Then, choose the coverage amount. Insurers may allow both partial or full conversion of the death benefit.
• Review New Premiums: Based on the coverage amount, understand the new premium structure. Remember, premiums are based on your current age and chosen coverage.
• Complete the Formalities: Request the insurer and complete the appropriate paperwork with your insurance company.

It’s good to thoroughly review the new policy document to understand your type of life insurance coverage, the death benefit, and cash value potential.

 Key Things to Understand

• Review details about the conversion benefit on your policy, including the age limit up to which you are eligible.
• Understand the circumstances when a medical exam may be waived.
• Know if partial or full death benefit is convertible.
• Make sure your new premium payment is within your budget.

Read: How is Life Insurance Paid Out to Beneficiaries

What Type Of Whole Life Can You Convert To?

Even if your insurer allows policy conversion, you may not be able to switch to any permanent policy the insurer offers. The availability may depend on terms specified in your policy document. Some common whole life options available through policy conversion riders include:

• Traditional Whole Life Insurance: It offers lifetime coverage and guaranteed cash value growth at level premiums.
• Limited Pay Whole Life: This offers lifetime coverage, but premium payments are covered in a set number of years, such as 10-pay, 15-pay, or 20-pay. After this your policy becomes 'paid-up,' but your coverage stays active.
• Participating Whole Life Policy: These are typically offered by mutual insurance companies. Beyond guaranteed death and cash value growth, you may also have access to dividends if the insurer performs well. You can use the dividends as cash, to reduce premiums, or for the purchase of paid-up additions (PUAs). Dividends aren’t guaranteed.

Other permanent life options that may be available:

• Fixed Universal Life Insurance: Policy offers lifetime coverage with flexibility to adjust premiums and death benefit, but cash value growth is based on interest rate set by the insurer.
• Indexed Universal Life: Another subtype of universal policy, it offers lifetime coverage and flexibility, but cash value growth is linked to a stock market index, which is subject to caps, floors, and policy fees that affect performance.

In addition to restricting options, some insurers may limit conversion to specific face value. The ‘conversion-only’ permanent products may differ across insurers. 

How Much Does it Cost to Convert Term Life to Whole Life?

Converting a term policy to whole life is generally more expensive, especially if your coverage amount remains the same. Premiums with a permanent life insurance policy are higher because they offer lifetime coverage. Some key points to note are:

• Whole life premiums are higher than term premiums for the same coverage.
• The earlier you convert, the more affordable your rate may be. Switching to a whole life insurance policy when you’re older will be more expensive.
• If you have a high coverage amount with a term policy, you can also consider a partial conversion to a permanent policy to manage your premium payments and keep them affordable. For instance, you could convert your $500,000 term policy to a $100,000 whole life policy.
• Converting your existing policy is often more affordable than buying a new permanent policy, especially if your health has changed.

Here’s an example:¹

Benefits & Drawbacks of Converting Term to Whole Life

Switching from your term life policy to a whole life insurance policy can provide lifelong coverage and added financial perks like cash value accumulation and legacy planning. But it also comes with increased premium costs and long-term commitments to make payments.\ \ Before opting for the conversion, it’s good to weigh the advantages and potential drawbacks to make the right decision as aligned with your life goals and financial situation.

Benefits

• Compared to term life, a permanent life insurance policy offers lifetime coverage instead of fixed-term coverage.
• With a permanent policy you can also accumulate cash value.
• Converting your existing policy helps you avoid underwriting, making it easier for you to get lifetime coverage if health issues are a concern.

 Drawbacks

• Premiums on a permanent policy are generally higher.
• Though cash value is accessible, it can take years to accumulate a significant amount.
• You may end up paying for lifetime coverage you don’t actually need right now.

Term Conversion vs Buying a New Whole Life Policy

Conversion of a term policy to whole life is convenient, but many people still think about comparing this option to buying a new whole life policy. Though both of these options can provide lifetime coverage, they differ in terms of underwriting requirements, pricing, availability, and risk.

Here is a comparison:

Is Converting Term Life Worth It?

Converting from a term insurance to a permanent policy might be the right choice for you or not depending upon your life goals, priorities, and financial situation.

When conversion may be a good idea

• You want lifetime coverage.
• Your health is deteriorating, and buying a new policy could be difficult.
• You want to accumulate cash value.
• Conversion cost is cheaper than buying a new policy.

When conversion may not be a good option

• You have no dependents.
• A higher premium isn’t a good fit for your budget.
• You plan to pay a lower premium and invest the difference in other ways.
• Conversion cost is very high due to age or health conditions.

Read: Private Placement Life Insurance

Are There Better Alternatives than Converting My Term Policy?

If by any chance you don’t want to convert your term insurance policy but still need coverage, here are a few alternatives you can consider:

• Renew or extend your term life policy for a period that can meet your long-term goals.
• Buy a new permanent life insurance policy from another insurer if their rates are more favorable.
• If you want a way to save money, continue with your term policy and invest the difference in premiums through other investment strategies.
• Keep your term insurance active and purchase a smaller whole life policy with a low coverage amount to provide lifetime protection.