- If you have a term life insurance policy, it will expire after a certain period.
- You can convert some term life policies to permanent policies that never expire and carry a cash value.
- You must convert your life insurance policy within a specified period, usually five to 20 years.
There are two main types of life insurance policies to choose from: permanent life and term life.
Unlike permanent life insurance that never expires and has cash value, term life insurance has a timeframe — five, 10, 20, or 30 years. If you outlive your term life policy, you must reapply for coverage. If you're older, you may not be able to get a 20- or 30-year term due to health issues.
In your 40s and 50s, your life insurance needs change. You need a life insurance policy that helps you prepare for retirement and includes some type of coverage for long-term care. A term life policy does not offer that, but a permanent life insurance policy does — and it never expires.
For this reason, it is good to consider converting a term life insurance to a permanent life insurance policy.
What is term to whole life conversion?
A convertible term life insurance policy expires after its term ends and converts to a permanent life insurance policy, which provides coverage for the rest of your life. This allows you to take advantage of cheaper premiums offered by term life at first. Then, switch to a comprehensive permanent policy later, with lifelong coverage and a savings vehicle. Plus, you don't have to undergo a medical exam again to prove you're insurable.
Term to whole life insurance conversion is typically available through a conversion clause in your term policy or through a term conversion rider, but if you have any doubts, talk to your life insurance agent about whether your policy is convertible.
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Benefits of insurance policy conversion
Lifelong coverage
Maria Roloff, a wealth advisor at Northwestern Mutual Insurance mentions that a life insurance conversion allows you to extend your term life policy permanently without needing to go through the underwriting process again. This means you won't be required to complete a medical exam or answer questions about your lifestyle, which could be helpful if your health has changed.
Builds cash value
Permanent life insurance policies offer a cash value component, which grows your policy by saving or investing a portion of your premium. You can withdraw or borrow from your cash value to for pay for long-term care, policy premiums, or leave a larger death benefit for your beneficiaries. The money in your account grows on a tax-deferred basis, meaning that you don't have to pay taxes on contributions or earnings until withdrawal.
Life insurance is the optimal way to prepare for retirement, according to Rosalyn Glenn, a financial advisor with Prudential. As she explained, "You can use life insurance to generate income for yourself in retirement because the permanent life insurance policy builds up cash value. So when you're 65, you can set it up to pay you a monthly income."
Considerations before converting
Cost
While conversion locks in your insurability, you'll still have to pay higher premiums on a permanent life policy, which provides lifelong coverage and cash value. Assess your income, expenses, and other financial obligations to determine if you can comfortably afford the cost. Not being able to pay for your premiums could cause your policy to lapse, meaning you lose out on your death benefit and cash value.
Be aware that several providers also charge a fee for conversion based on the amount being converted.
Alternatives
If you are on a fixed income and cannot convert an expiring term life insurance policy to a permanent policy, consider final expense life insurance. This type of insurance is also referred to as burial insurance because the death benefit is low — usually only enough to cover funeral and burial costs.
If your age or health prevents you from getting a traditional term life policy, no-medical-exam life insurance is another option. Final expense is a type of no-medical-exam life insurance that is guaranteed, regardless of your health. Simplified issue is another no-medical-exam life insurance option, but it requires a health questionnaire, and it has higher death benefits than final expense insurance (up to $100,000).
Talk to your insurance agent and financial planner to see what life insurance works best for your financial situation, budget, and goals.
How to convert
When you convert term life insurance to permanent, you take a portion (or all) of your term insurance and change the coverage to permanent, according to Roloff. If you convert part of your term life, you will have two separate policies—one term life and one permanent life.
Partial conversion
To avoid being without coverage when your term life insurance policy expires, consider a combination of term and permanent life insurance. Roloff recommends that clients "blend permanent and term life to fit their budget while allowing for maximum coverage."
The benefit of blending insurance is that even if you can't afford $500,000 in permanent life insurance, having half in term life insurance and the remaining half in permanent life insurance at least gives you the ability to have some coverage that never expires and has a cash value component.
You would need to talk to your insurance agent or financial planner about what combination and blend works for your budget and financial goals.
Timing and deadlines for conversion
Not all term life insurance policies can convert to permanent life insurance. For those that can, there is a window of time to exercise the conversion, known as the conversion period or conversion window.
The conversion period will be outlined in your policy. Some insurance companies allow you to convert within the first five years of the term policy. Other companies have a conversion window within the first 20 years of the term. Some insurance companies will not allow you to convert a term policy if you are 65 years or older; it really varies.
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FAQs
Can any term life insurance policy be converted to whole life?
Most term life policies include a conversion option. However, restrictions, such as conversion deadlines and age limits may apply. It's best to but it's to review your policy's terms or consult with your insurer for specifics.
Will I need to undergo a medical exam to convert my policy?
One key benefit of conversion is bypassing another medical exam requirement. This makes it easier to obtain whole life coverage even if your health has changed.
How does converting my policy affect my premiums?
Since whole life insurance offers lifelong coverage and includes a cash value component, your premiums will rise upon conversion. However, your rates are locked in rates for the rest of your life based on your age at the start of your whole life policy.
Is there a deadline for converting my term life insurance policy?
Yes, most insurance companies enforce a deadline for when you must convert. This can range from five to 20 years of the term. Some insurers require you to convert before you turn 65 years old.
What happens to the cash value in a converted policy?
When you convert from a term life to a whole life insurance policy, your policy begins to accumulate cash value. This money grows over time and can be used for future financial goals like retirement or leaving a legacy for your dependents.
