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.
If you choose the right term length, the coverage will be in force during the most crucial financial years for your family—for example, up until the point your mortgage is paid off or your kids have made it through college.
“If the goal is to protect you while you’re building a nest egg, term insurance is a great choice,” says Dennis LaVoy, a Certified Financial Planner, Chartered Life Underwriter and founder of Telos Financial in Michigan. “Term insurance is a good fit for a lot of situations and covers most people.”
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
Converting a term life policy to a permanent policy is much simpler than applying for a new policy. First, check the language of your policy to see if conversion is an option (it is on most policies).
Next, check the term conversion period—the time frame during which you can convert. Some companies will allow policyholders to convert at any point during the term of their policy. But many will limit the conversion period, says Henry Hoang, founder of Bright Wealth Advisors and Bright Life Insurance in California. For example, the conversion period on a 20-year term policy might be limited to the first 10 years the policy is in force.
“If you know when that deadline is, you want to be sure you can make the conversion before the period expires,” he says.
Then contact your insurance agent or company to ask to convert your policy. You won’t have to take a life insurance medical exam or go through the underwriting process, says Dane Spealman, a State Farm insurance agent in Pikeville, Maryland. In fact, the underwriting class you were assigned when you bought your term policy (standard, preferred or super preferred) won’t change even if your health has changed.
You’ll simply fill out a questionnaire, and your new permanent policy will be issued within a few days, he says.
The Cost of Converting
There are no fees to convert a term policy to a permanent policy, Spealman says. However, the rate you pay for coverage—your premium—will increase. How much it increases depends on several factors.
Although your health won’t be a factor because you lock in your original underwriting class, your age when you convert will affect your rate. The older you are, the higher your premium will be.
The amount you convert also will impact your premium. You have the option to convert the full value of a term policy or just a portion of it. For example, if you have a policy with a $500,000 death benefit, you could convert just $250,000 of it to a permanent policy. You’ll pay less for a permanent policy with a smaller benefit—and the premium on the remaining term life policy will drop because the benefit has been reduced.
When you convert might also affect your rate. For example, Spealman says that State Farm gives term life policyholders a credit for the amount they’ve paid toward their policy that can be applied to the cost of a permanent policy if they convert within the first few years of getting a policy. So it’s worth checking with your insurer to see if you have this option because it could save you some money.
Finally, the type of permanent policy you choose to convert your term policy to will factor into your premium. (Note too that you may be offered only one policy type for a conversion, such as a universal life insurance policy.) For example, the premium for a whole life insurance policy will be higher than the premium for a universal life insurance policy, Hoang says.
Reasons to Convert a Term Life Policy
Just because your insurance agent or company mails you a letter telling you that you should take advantage of an opportunity to convert your policy doesn’t mean you should. After all, there was a reason you bought a term life policy rather than a permanent policy. However, there might be a reason now that a permanent policy will be a better fit.
You’ve had a change in health. Converting a term life insurance policy to a permanent policy allows you to extend your coverage without going through the underwriting process. This can be a valuable option if your health changes for the worse. If you wanted to get a new term life policy to extend your coverage, you would have to pay astronomical rates or could even be uninsurable, Hoang says. But if you convert, your current health won’t affect the premium on a permanent policy or your insurability.
Your budget has changed. You might have wanted to buy a permanent policy from the get-go but couldn’t afford the higher premium. If you’re making more money now, it can make sense to convert if the higher premium on a permanent policy fits within your budget, LaVoy says.
You want a cash value asset. One of the benefits of a permanent life insurance policy is that part of your premium goes toward the cost of insurance and part of it goes toward building cash value. Some people want cash value life insurance so they can access the cash during retirement (or for other reasons) tax-free. It shouldn’t be a substitute for saving for retirement in an account such as a 401(k), but it can be part of a financial plan.
You want to leave a legacy. If you want to be able to leave an inheritance for your children but don’t want to scrimp during retirement just to ensure there’s cash left to pass on, a term life conversion can help solve that problem.
“At retirement, someone might want a permanent policy to get peace of mind to spend more liberally and still leave money for the kids,” Hoang says. The permanent policy can be in force no matter when you die and will pay a death benefit to your beneficiaries.
You want to have funds to cover your final expenses.
Questions to Ask When Converting
Before you convert a term policy, there are several questions you should ask yourself and your life insurance agent or company
What’s your goal in converting? Hoang says you need to know your objective when converting to a permanent policy. Discuss what you want to achieve with your insurance agent so you can choose the right permanent policy for your goal.
What can you afford? You will pay more for a permanent policy. So you need to consider not only whether you can afford the higher premiums now but also in retirement. You might find that getting another term policy will meet your goals and be more affordable than a permanent policy.
What permanent policies are available? In the past, it was common for insurance companies to let term life policyholders convert to any permanent life insurance policy in the company’s portfolio, says Jason Hill, a financial advisor and founder of CFA Insurance. Newer policies tend to have more restrictions. For example, you might only be able to convert to a universal life policy. So check with your insurer to see what policies are available before committing to a conversion.
Can you get a long-term care benefit? You might be considering converting to a permanent policy because some of those policies offer the option to add coverage for long-term care. However, your insurer might offer a long-term care benefit only on a certain type of permanent policy, or not at all. For example, Spealman says State Farm offers long-term care benefits only on universal life policies.
Can you get a rising death benefit? Typically, if you want to convert to a permanent policy with a higher death benefit than what your term life policy has, you’d have to go through the underwriting process again. You can get around the underwriting requirement, though, if the insurer offers a permanent policy with a rising death benefit, Hill says. The premium will be higher, but the value of the policy will rise over time, giving you a bigger death benefit than you originally had, Hill says.
By asking these questions, you might find that the permanent policies your insurer offers aren’t right for you. If you are in good health, shop around to see what else is out there, LaVoy says. You might find that by getting rate quotes from other insurers for either term or permanent life policies that there are better deals available than what you’d get by converting.