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Converting Life Insurance: What to Expect

At some point, term life insurance policy owners will be faced with letting their term policy expire or converting to permanent life insurance. Term life insurance gives policy owners coverage for a specific period, making it affordable and often the first life insurance many consider. What if you decide you want to be covered for life? That’s when policy conversion comes in. Let’s examine what life insurance conversion means.


What we will be covering:


What is term life insurance conversion?

Term life insurance conversion is converting it into a permanent life policy. You can often do this without needing a medical exam or providing evidence of insurability. This conversion privilege is usually included in term life insurance contracts, allowing policyholders to extend their coverage beyond the initial term.

While term life insurance provides coverage for a specific period, usually 10 to 30 years, it will eventually expire if the policyholder is still alive. Converting a term policy allows policyholders to transition into a permanent life insurance policy. This could be whole or universal life, which provides coverage for the rest of their life, along with benefits not available with term life.

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Types of life insurance policy conversions

When you are ready to convert your policy, you’ll have options for policies to meet your needs. Below you'll find some conversions to consider.

Term to whole life conversion

One of the most common conversions is converting term life policies to whole life insurance policies, which provide coverage for the policyholder's life. For some of the benefits of permanent policies, whole life insurance offers a guaranteed death benefit, plus a savings component known as cash value and level premiums that remain constant throughout the policyholder's lifetime.

Term to universal life conversion

Another option for converting term life insurance is changing to universal life. Universal life insurance also provides coverage for the policyholder's lifetime. The difference is that universal life policies offer more flexibility in premium payments and death benefits. As with whole life, universal life insurance policies also have a cash value component that can grow tax-deferred and may offer the potential for investment returns. However, universal life gives you much more control over your investment component inside the policy.

Group term to individual policy conversion

Another typical instance of conversions is when you are separating from your employer and have life insurance through them as a group member. Most employer life insurance is eligible to be converted. If this is your situation, you may also have the option of converting to another term policy or permanent insurance.

Understanding the conversion period

You need to know the conversion period if you are considering converting a policy. This is the period the current policy gives you so you can convert it. Every policy with a conversion option also comes with a deadline when you have to complete the conversion; otherwise, you will not be able to convert it after that.

Conversion deadlines and expiry dates

Some insurance companies let policyholders convert their policy at any point during their term; others impose limitations. For example, the conversion period on a 20-year term policy might be limited to the first 10 years. Knowing your policy’s conversion deadline is essential if you consider taking advantage of this option.

Factors affecting the conversion period

There are a few factors that can influence the length of the conversion period on a policy. These may include the policyholder's age, policy type, and the insurance company's policies and regulations. Generally, the older you are, the shorter the conversion period may be. Review your policy documents or contact your insurance company to know the exact details of the conversion period.

How to convert term life insurance to whole life insurance

Once you have decided to convert your policy, the process shouldn’t be too difficult. Here's what is typically need to do:

  • Contact your insurance provider. Contact your insurance agent or the insurance company directly to get started. They will walk you through the process and give you the forms you need to submit.
  • Review conversion options and policies. Once the insurance company gives you conversion options, read the fine print to know what policy will meet your needs. You want to consider the death benefit, premiums, cash value potential, and any additional riders or benefits they offer.
  • Complete the conversion application. Once you have chosen conversion and reviewed all the related information, you will need to fill out the application that your insurance company provided. They will need you to submit details about your existing policy, personal information, and how much coverage you want to convert to the new policy.

After applying, the company will review your information and issue a new insurance policy within a few days. In most cases, you will not be required to undergo a medical exam or provide updated evidence of insurability.

The cost of converting term life insurance

Converting a life insurance policy usually means your premiums will go up. This is expected if you convert from a term policy to permanent insurance. Other things can influence the cost of conversion, such as age, the amount being converted, and the type of permanent policy you want to convert to.

Premium increases based on age

The age you are when you convert a policy will have the greatest influence on the cost of the new policy. Generally, the older you are, the higher the premiums will be. If you have to qualify for the new policy, your health condition will likely also play a factor. Sometimes, a health condition may make it prohibitively expensive to convert. Only you will know when it makes sense to convert.

Impact of the conversion amount on premiums

The amount you want to convert from your term life insurance policy to the new permanent policy can also affect the premiums. Converting the full value of the term policy will probably be more than you anticipate, considering how affordable term policies are because you probably got it at a younger age. Be conscious about these increases as you weigh your options for a new policy.

Premium differences between whole life and universal life

The kind of permanent policy you choose, whether whole or universal life, will also affect your new premiums. Whole life insurance policies typically have higher premiums than universal. Review the premium amounts for different policy types and select one that fits within your budget.

Conversion credits and discounts

Some insurance companies offer conversion credits or discounts to incentivize policyholders to convert their term policies. These credits can help offset the increase in premiums associated with the conversion. You may want to check with your insurance provider to see if they have any conversion credits or discounts you can use.

Reasons to consider term life insurance conversion

There are many reasons policyholders find themselves considering the conversion of a life policy. Here are a few common reasons to convert:

Change in health condition

If your health is not as good as when you bought a term life insurance policy, converting it to a permanent policy may not require a new medical exam or evidence of insurability, so you are almost guaranteed to qualify. Even if you are no longer in good health, you can still buy a permanent policy instead of being denied a new one.

Providing for dependents

We all realize the unpredictability of life, and your coverage needs will more than likely change over time. If you find yourself in a situation where you need to provide for dependents beyond the initial term of your policy, converting to a permanent policy can help you adjust to life’s changes and cover your loved ones as needed. Whether it's caring for a family member with special needs or unexpected changes in your family structure, converting to permanent coverage can offer much-needed peace of mind.

Taking care of outstanding debts

If you still have unpaid debts that need to be taken care of after your term life insurance policy expires, converting to a permanent one is a good idea. Increasing your coverage means your loved ones won’t burdened with significant and unexpected financial responsibilities in the event of your untimely departure. Converting a portion of your term policy to a permanent policy can help cover these debts and may even reduce the premiums on the remaining term life policy.

Wanting cash value and investment options

Cash value policies such as whole and universal life are excellent options if you are looking for ways to make your money grow and do it safely. You are given a guaranteed rate of return, albeit not substantial, but there is no risk of loss in whole-life policies. Even on universal policies, you are not risking your capital, yet taking advantage of market upturns.

Estate planning and leaving a legacy

This is an area where life insurance aids as a financial tool. Whether you want to transfer substantial wealth tax-free, prepare for estate taxes, or provide a loved one with an annuity after you are gone, there is a permanent life policy to address those needs.

Alternatives to term life insurance conversion

While converting term life insurance to a permanent policy is viable in many cases, it may not be suitable for everyone. Here are a few alternatives you can consider:

  1. Renewing your term policy. If you still have a need for life insurance coverage but don't want to commit to a permanent policy, renewing your term policy may still be a practical choice. Remember that premiums typically increase each time you renew a term policy since age greatly contributes to premium ratings.
  2. Purchasing a new term life insurance policy. There is also a chance that your current coverage and policy simply no longer meet your goals; if that’s the case, buying a new term policy may be better than converting. This way, you can customize your policy to your needs.
  3. Exploring other insurance options. Consider alternatives such as final expense, burial, or long-term care insurance. These policies have more specific use cases and may give you the peace of mind you need.

Converting a life insurance policy is a convenient way to accomplish different objectives based on your goals and current policy type. If moving from one job to another, converting from employer-provided life insurance to private life insurance often becomes necessary to maintain coverage.

If you own a term policy and you'd like to have one that can give you cash value in the future, or if that term policy expires, converting it to permanent insurance is the logical step to take. As we have covered, these and other reasons make understanding the conversion process necessary to make the right decision.

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