How to Convert Term Life Insurance to Whole Life

Term life insurance covers you for a set period. As your plan approaches its expiry date, you may realize you still need life insurance protection.

Thankfully, you may not have to apply afresh and go through the underwriting process again.

You might be able to convert your existing policy to whole life insurance without submitting proof of good health.

How to Convert From Term Life to Whole Life Insurance

Converting to whole life insurance is a fairly simple process. Here is what you need to do:  

1. Contact your provider to find out if your policy is still in the conversion period.  

2. Find out the conversion cost.

3. Decide the amount you want to covert.

4. Fill out the conversion application.

5. Pick the mode of premium - annual, semi-annual, quarterly, or monthly.

6. Designate beneficiaries.

7. Sign and submit the application.

What is a Conversion Clause?

Term life insurance policies often include a conversion clause, also known as a term conversion rider. It allows the policyholder to convert their term life plan into a permanent life policy. You can convert without having to submit proof of good health. That means you will not have to take a medical test and answer invasive health questions again.

Keep in mind that this clause comes with an expiry date. You can only convert term life insurance to permanent insurance within the period mentioned in the conversion clause. The term conversion period varies from one insurer to another. Some policies may allow you to convert within the first five or 10 years. Others allow conversion until the policy expires.

Depending on the insurer, you might be able to convert to any of the various permanent life plans on offer or only one of them. No matter what type of permanent life insurance you choose, your premium will go up because a permanent life insurance policy is more expensive than term life. However, the increase will not be related to health. You will receive the same risk class as your term life insurance policy, regardless of your current health.  

You can convert based on your current age or opt for original age conversion. If you opt for original age conversion, your new policy’s premium will be based on your age at the time of issue of the term life insurance policy and hence will be lower. However, you will have to pay all of the owed premiums with interest at the time of issue of the new policy.  

If you convert based on your current age, the cost of life insurance will be higher, but you will not have to pay a lump sum.  

Not all term life insurance policies have a conversion clause, but most do. While these policies are slightly costlier, the extra cost may be worth it. The conversion clause gives you peace of mind that should your life insurance needs ever change, you can switch to a permanent life insurance policy without any underwriting. As long as you make the request within the conversion period, the insurer cannot turn it down.  

How Does a Conversion Clause Work?

Let us say at age 30, you purchased a 20-year term life plan with a conversion clause of 10 years. Eight years into your contract, you develop a chronic health condition.  

Since the conversion period has not yet expired, you can convert to permanent life insurance. If you now want lifelong protection, this is a better option than the other two choices available to you: a new permanent life policy and renewal of the existing term plan.  

Because of the underlying health problem, a new permanent life plan may be seriously expensive or even out of reach. While your current health status does not come into play if you renew the existing policy, a term life insurance policy is only renewable up to a certain age, such as 65. At that age if you still need life insurance, you will likely have no other option than guaranteed issue life insurance, which offers very limited coverage.  

You can convert the full value of your existing policy or a part of it. In either scenario, you will retain your original risk class. Let us say you received the Preferred Plus risk class at the time of issue of the term life insurance policy at age 30. Now when you convert to a permanent life insurance policy eight years later, your risk class will remain Preferred Plus, your current health notwithstanding.    

When you convert only a portion of your term life plan, you actually create two separate policies. The insurer will adjust the premium of the term policy based on the new coverage amount.  

Reasons to Convert From Term Life to Whole Life Insurance

People convert to whole life insurance for different reasons. These include:  

Permanent life insurance accumulates cash value

Permanent life has a dual purpose. It provides lifelong life insurance coverage and acts as an investment tool. Part of your premium goes toward covering the cost of insuring you, while the remainder goes to an investment account built into your permanent policy. The cash value grows at a moderate rate on a tax-deferred basis. This can be advantageous for people who have already maxed out other investment vehicles or who find saving money hard. You can tap into your cash value any time to meet a financial emergency or use it to supplement the retirement income years down the line.  

Your family may not collect the term life insurance payout

Term life insurance is much cheaper than permanent. That is mainly because there is a good chance the insurance provider will not have to pay the death benefit.  

With term life insurance, your survivors receive the policy proceeds only if you pass away during the policy term. The shorter the policy term, the greater the chance you will outlive it. That is why term life plans that last only a few years are very affordable, with premiums often as low as the cost of a cup of coffee a day.  

Think of term life insurance like auto or health insurance. You regularly pay the premiums but do not receive anything in return until a claim is filed.  

In contrast, with a permanent life policy, your family is guaranteed to receive the death benefit, unless you cash it out first. In that sense, it is more like an investment.  

You have a lifelong dependent

If you have a special-needs child or a financially-dependent parent, you may want the peace of mind that a permanent life policy offers. The proceeds of your policy can help ensure your loved one receives all the necessary medical care and is able to live comfortably after you die.  

You have health problems

Term life insurance is renewable up to a certain age. For most people, this is not a problem. Most people take out a term plan hoping that they will not need life insurance after retirement. By then they would be financially independent, have paid off their debts, and have fewer dependents, if any.  

However, life does not always work out the way we expect. If after purchasing a term life plan you develop a health problem and believe that you may need life insurance after retirement, consider converting into a permanent life insurance policy while you still have the chance. Purchasing life insurance after retirement is hard enough if you are healthy. With one or more underlying health issues, it can be almost impossible.  

When you put forward a conversion request to the insurer while the conversion clause is still active, the insurer cannot say no. Moreover, you will receive the same rating as the term life policy — even if you had taken out the policy years ago.  

You need life insurance for estate preservation

Life insurance needs are not set in stone. They may change over the years. Let us say you purchased a 20-year term life plan 10 years ago to cover your mortgage. Thanks to favorable circumstances, you were able to pay off the home loan more quickly than you expected to and now would like to use life insurance as an estate planning tool. Namely, you want life insurance proceeds, which are tax-free, to pay for expenses that arise on death, including funeral expenses, taxes, and probate fees. This will ensure the value of your estate does not diminish and your heirs receive the inheritance as desired.  

Permanent life insurance is a great choice for estate preservation, as the payout is guaranteed. The same, however, cannot be said about term policies.  

You can now commit to a long-term contract

Permanent life insurance offers many advantages, but there is no denying that sometimes it can be prohibitively expensive, especially if you are just starting out. If you earlier purchased a term policy only because it was cheaper but now can afford a permanent life plan, converting the existing policy may be a better option than buying a new one. Your new premium will be based on your current age, not current health status.  

The Cost of Converting your Policy

The insurance carrier will not charge a fee to switch you to permanent life insurance. But it will increase your premium rate. Your new premium rate will depend on three factors:

1. Your current age (unless you opt for original age conversion and pay a lump sum). The older you are at the time of conversion, the costlier the premium.  

2. The death benefit of your new policy. Depending on your life insurance company, you may have the option to convert the full value of your existing policy, a portion of it, or both. The bigger the death benefit, the higher the insurance premium.  

3. The type of permanent life insurance you switch to. Whole life insurance is more expensive than universal life, all other things being equal.  

Important Questions to Ask When Converting

Before converting to permanent life insurance, there are a few things you should discuss with your agent or provider.  

• Which type of permanent plan suits your goals best? You need to know why you want to convert. Next, discuss with your agent or provider to find out which type of permanent policy will be right for you.  
• How much premium you can afford? Permanent life insurance is pricey. While its steep premium may not pinch right now, will you be able to afford it post retirement? If higher premium is a concern, one option is to convert only a part of your term life insurance policy. Another option is to take out a new term life policy.  
• What permanent plans are available? Some insurance carriers allow policyholders to switch to any of the permanent policies in their portfolio. Others are more restrictive and may give only one option, whole life or universal life. Universal life is more complicated and sometimes requires close monitoring. As such, it may not be right for everyone. Speak to your provider about all the conversion options available before filling out the forms.  

Alternative Options to Life Insurance Conversion

• Purchase a new term policy

If your existing policy is approaching its expiry date, consider purchasing a new term policy. Given how expensive whole life insurance is, this option is likely to be more affordable than converting your existing policy. While you will have to take a new medical test, the inconvenience is worth it. Depending on your age, your current health, and the term length, you could potentially save several hundred dollars over the life of your policy.    

• Use the ladder strategy

The ladder strategy is a cost-effective way to meet life insurance needs that change over time. It involves purchasing multiple term life policies with different expiration dates instead of taking out one policy for all your needs. It takes advantage of the fact that your life insurance needs decrease as you get older and ensures you only pay for coverage that you need.  

Conclusion

Term life insurance is more affordable than permanent life insurance, but it provides coverage for a limited period. Most term plans come with a conversion clause that can come in handy if your life insurance needs have changed. The conversion clause allows you to convert a term policy to a permanent plan without proving insurability. Your new premium rate, however, will be higher because permanent life insurance is much costlier compared to term life. If you cannot afford the cost of conversion but need protection beyond the existing term, you may consider buying a new term life policy or using the ladder strategy to stack multiple term life plans with different expiry dates.    

FAQ’s

Is term life insurance better than whole life insurance?

Different people have different life insurance needs. Whether term life insurance or whole life is better for you depends on your personal situation. Cost is also an important factor because the premiums for term life insurance are 10 to 15 times more affordable than a comparable whole life plan.  

Generally speaking, term life is more suitable for people with financial needs that have an end date. If you want life insurance until you become financially independent, pay off your debts, or have no financial dependents, you should consider a term policy. You can match the term of your policy to your longest financial obligation to ensure you will have coverage as long as you need it.  

Whole life insurance, by contrast, is a better option if you want lifelong financial security. Maybe you have a special-needs child or want to leave an inheritance for your children and grandchildren. Whole life is also worth considering if you are a high-net-worth individual and want to use life insurance as an investment.  

What does it mean to convert a life insurance policy?  

Converting your term life policy to permanent life means switching to another type of life insurance policy without any underwriting.  

How to convert term life insurance to whole life insurance?

First, make sure your policy includes the conversion clause and the conversion period has not expired. Then, decide whether you want a full or partial conversion. Depending on your insurer, you may have the option of both or only one of them. Next, contact the insurer and submit the necessary forms.  

How much does it cost to convert term life to whole life insurance?  

If you switch from term life insurance to permanent life, you will not have to pay any conversion fee, but your premium will go up. How much it increases depends on two things:  

1. the amount you convert

2. whether you want to convert based on your current age or your age when the original policy was issued.