How and Why to Convert Term Life to Permanent Life Insurance
Term life insurance often is touted as an affordable way to provide a financial safety net for loved ones who count on you for support.
It costs less than permanent life insurance because it provides coverage for a limited number of years rather than indefinitely.
It’s also cheaper because term life insurance doesn’t have the cash value or internal policy charges that many permanent life insurance policies have.
But goals can change.
You might later find that the term length of your life insurance policy isn’t long enough to meet your needs.
You might even decide that what you really want is coverage that lasts a lifetime. Does that mean you have to go back to square one and get a new policy? Not necessarily.
Term life insurance policies typically offer the option to convert them into permanent life insurance policies.
Making the switch is easy, but deciding whether it’s the right move isn’t that simple.
Here’s what you need to know about how and why to convert term life to permanent life insurance.
How to Convert Term Life to Permanent Life
Many term life insurance policies come with a provision allowing you to convert the policy to permanent coverage for a certain number of years after the policy is in force.
Premiums will change
The premiums on the permanent insurance will be based on the status of your health at the time you purchased the original term policy.
The key change:
The premium on permanent life insurance will also be based on your age at the time of conversion.
This means it will be higher than what would have been the case had you simply purchased permanent coverage instead of term at the time you took the original term policy.
It’s important to understand that even if your policy does have a conversion option, it’s not unlimited.
For example, if you have a 20-year term policy, it may provide for conversion only within the first 10 years. If the 10 years pass and you haven’t converted, the option will disappear. That will leave you needing to medically qualify for a whole new permanent life insurance policy.
The actual term of the conversion option will vary by insurance company and policy.
For example, while one company may allow you to convert within the first 10 years of a 30-year term policy, another may offer the option for the entire 30-year term.
Apart from the term of the conversion option, many companies also impose a certain age limit.
For example, if a company has a maximum conversion age of 75, you’ll need to complete the conversion before you reach that age, regardless of the term of the conversion option within the policy. Even if you take a 30-year term policy at age 60 with a conversion option in place for the entire term, it will expire when you turn 75 if you don’t exercise it.
Whatever the terms of the conversion provision are, you’ll need to contact the life insurance company when you’re ready to convert.
Once again, as long as you complete the conversion within the timeframe allowed, the permanent policy premium will be based on your health at the time you took the original term policy.
However, there will be a higher premium based on your age at the time of the conversion.
Under many conversion options, you’ll have the ability to convert less than the full amount of your term policy to permanent.
For example, if you have a $500,000 term policy, you may be able to convert $100,000 of it to permanent coverage.
The provision may even allow for multiple partial conversions within the conversion term.
For example, if you have a 30-year term policy that allows for conversion to permanent for the entire length of the term policy, you can convert 20% of the term policy to a permanent policy every five years. At the end of 25 years, you will have completely converted your term policy to permanent coverage (this strategy is known as “laddering” or a “laddered conversion”).
In that way, you’ll be able to stairstep your conversion from term to permanent, which may fit better within your household budget than doing a full conversion all at once.
Cost of Converting Term to Permanent Life
There is generally no cost involved in the actual conversion from term to permanent life insurance.
However, most insurance companies will charge a slightly higher premium on your term policy for the conversion option.
Exactly how much that will be will depend on the company, the dollar amount of the conversion, and the timeframe within which conversion is permitted.
For example, a 30-year term policy that gives you the option to convert to permanent coverage any time within 30 years of the original term will have a higher premium adjustment than one that permits conversion only within the first 10 years.
As well, though your health will be evaluated based on your condition at the time you took the original term policy – rather than at the time of conversion – there will be an adjustment for age.
That means the conversion to a permanent policy will carry a higher premium at age 40 than it would have if you have made a change at age 30.
But the biggest single cost factor involved in converting term life insurance to permanent is the basic fact that permanent life insurance costs much more than term life insurance.
For example, it generally costs about 10 times more in premiums for whole life insurance than it does for a term policy with an equivalent death benefit.
Naturally, the payment shock of the conversion to permanent coverage – in addition to the age adjustment at the time of conversion – can be cost-prohibitive.
This is a major reason why you may want to do a partial conversion, if that option is available.
If you only convert 20% of your term policy to permanent life, that will lower the premium to about 20% of what it would be if you did a full conversion.
The partial conversion can also be beneficial on another front.
Let’s say that at age 30 you take a $500,000 term policy owing to the fact that you had young children and a big mortgage obligation. But when you make the conversion at age 50, your children are grown and your mortgage is paid in full. Your life insurance needs may be fully met with a permanent policy for $100,000 or $200,000, instead of the original $500,000.
Reasons to Convert a Term Life Policy to Permanent Life
Though it doesn’t make sense in all cases, there are several reasons why a conversion may be worth doing:
Get the benefit of permanent life insurance
Just as the name implies, a permanent life insurance policy will be in force for the rest of your life.
This is unlike term, which will expire at the end of the stated term of the policy.
Fixed life insurance premiums
Just as a permanent life insurance policy has a permanent death benefit, the premiums for the policy are also permanent.
That means the premium you pay at age 40 will be the same when you are 50, 60, 70 and 80. This is completely unlike term insurance premiums, which will increase at the end of the term. Your term policy may enable you to renew to another term plan, but it will be based on your age at the time of renewal and typically carry a shorter renewal term.
For example, when a 30-year term policy ends, you may be permitted to renew it based on a five-year term. That means your premium will adjust higher every five years, due to your higher age at the time of renewal. This problem will be eliminated with a conversion to permanent life insurance.
Conversion is unaffected by a change in your health status
If you currently have term life insurance, and your policy expires, you may not be eligible for an extension or a new policy based on a deteriorating health condition.
However, since conversion to permanent coverage is based on your health at the time you apply for the original term policy, you’ll be able to qualify for permanent life insurance without regard to the condition of your health at the time of conversion.
Cash value accumulation
Permanent life insurance policies typically include a cash value accumulation provision.
While the premiums for permanent insurance are higher than they are for term, at least some of the premium is going into the cash value. That means you will be building a financial asset at the same time you are maintaining a life insurance policy.
You may be better able to afford permanent life insurance at a later date
Term life insurance makes the most sense for those with high financial obligations – typically younger people – and limited budgets.
But that permanent life insurance policy you weren’t able to afford in your 20s may be easily accommodated by your budget in 10 or 15 years.
A term-to-permanent life insurance conversion option is highly desirable, even if you don’t think you’ll ever take advantage of it.
Life insurance is all about preparing for the unexpected, and an event that may cause you to choose to convert your term policy to permanent is likely to be unexpected as well.
The conversion option gives you the right – but not the obligation – to convert your temporary policy to a permanent one.
Be sure to ask about the conversion option whenever purchasing a term life insurance policy. If it isn’t an automatic provision of the policy, you should request that it be added.
Even if it increases the cost of your premiums slightly, it’s an option worth paying a little bit extra for.