Converting Term Life to Permanent Life Insurance: When and How

What Is Term Life Insurance Conversion?

Term life insurance conversion is a policy feature that lets you switch your term coverage to a permanent life insurance policy. You do not need to take a medical exam or answer health questions. The insurance company must accept your conversion as long as you are within the allowed time window.

This feature is called the conversion privilege. It is built into many term life insurance policies. Not every term policy includes it, so you should check your contract. The conversion privilege is one of the most valuable features in a term life policy.

When you convert, your new permanent policy replaces your term policy. You keep the same death benefit amount, or you can choose a smaller amount. The conversion happens with the same insurance company. You cannot convert a term policy from one insurer into a permanent policy from a different insurer.

How the Conversion Privilege Works

The conversion privilege is a contractual right inside your term life policy. It guarantees you can switch to permanent coverage under specific conditions. Here is how the process typically works.

You contact your insurance company and request the conversion. The insurer gives you a list of permanent policy options you can choose from. You pick the permanent product that fits your needs. You start paying the new premium, which will be higher than your term premium. Your permanent policy begins, and your term policy ends.

The biggest benefit is that no underwriting is required. Underwriting is the process where the insurer reviews your health, medical history, and lifestyle. During a conversion, the insurer skips all of that. Your health at the time of conversion does not matter.

Why You Might Want to Convert Your Term Policy

There are several reasons why converting your term life insurance may make sense. Each situation is different, so consider your own financial goals and health before deciding.

• Your health has changed. If you developed a health condition after buying your term policy, a new policy may be too expensive or unavailable. Conversion lets you get permanent coverage at standard rates regardless of your current health.
• You need coverage that lasts your entire life. Term insurance ends after the term expires. If you still need coverage at that point, permanent insurance provides a death benefit that never expires as long as premiums are paid.
• Estate planning needs. Permanent life insurance can be used to cover estate taxes, leave an inheritance, or fund a charitable gift. These goals require coverage that does not expire.
• You want cash value. Permanent life insurance builds cash value over time. You can borrow against it or surrender the policy for its cash value. Term insurance has no cash value.
• Your term is about to expire. If your term policy is nearing its end and you still need life insurance, converting may be a good option, especially if your health would make a new policy expensive.

Conversion Deadlines You Must Know

Every term policy with a conversion privilege has a deadline. Once that deadline passes, you lose the right to convert. There is no way to get it back. Understanding your specific deadline is critical.

Deadlines vary by insurance company and policy. Here are the most common types of conversion deadlines.

• Age limit. Some policies allow conversion up to a certain age, such as 65 or 70. After you reach that age, the conversion privilege expires.
• Policy year limit. Some policies only allow conversion during the first 10, 15, or 20 years of the policy. After that window closes, you can no longer convert.
• End of term minus a set period. Some policies allow conversion up until a few years before the term expires. For example, a 20-year term might allow conversion only during the first 15 years.

Check your policy's declarations page or contact your insurer to find your exact conversion deadline. Mark it on your calendar so you do not miss it. Once the deadline passes, you cannot convert, even if you are willing to pay higher premiums.

No Medical Exam Required

One of the biggest advantages of conversion is that no medical exam is needed. When you originally applied for your term policy, you likely went through medical underwriting. This may have included a physical exam, blood work, and a review of your medical records.

During a conversion, none of that happens. The insurer must accept your conversion at the same health class you had when you bought the term policy. If you were rated as preferred plus back then, you keep that rating now.

This matters most for people whose health has changed. If you have been diagnosed with cancer, heart disease, diabetes, or any other serious condition, buying a new life insurance policy could be very expensive or even impossible. Conversion bypasses all of that.

Even if your health is fine, skipping the medical exam saves time and hassle. The conversion process is usually much faster than applying for a brand-new policy.

How Much Does Conversion Cost?

There is usually no fee to exercise the conversion privilege itself. However, your premiums will change significantly. Permanent life insurance always costs more than term life insurance for the same death benefit amount.

Your new premium is based on your attained age. This means the insurer uses your current age at the time of conversion, not the age when you first bought the term policy. The older you are, the higher the premium.

For example, suppose you bought a 20-year term policy at age 35. If you convert at age 45, your permanent policy premium will be based on age 45 rates. If you wait until age 50, the premium will be even higher. This is one reason not to delay conversion if you know you want permanent coverage.

Some insurers offer a credit or discount if you convert early in the policy term. A few companies use original age pricing, which bases the permanent premium on your age when you first bought the term policy. This is less common but results in lower premiums. Ask your insurer which pricing method they use.

Partial Conversion Options

You do not have to convert your entire term policy. Many insurance companies allow partial conversions. This means you can convert a portion of your death benefit to permanent coverage and keep the rest as term insurance.

Partial conversion is useful when you need some permanent coverage but cannot afford to convert the full amount. For example, you might have a $750,000 term policy. You could convert $250,000 to whole life for estate planning purposes and keep $500,000 as term to cover your mortgage and income replacement needs.

Most insurers require a minimum conversion amount, often $25,000 or $50,000. Check with your insurance company for their specific minimum. Keep in mind that a partial conversion may reduce or limit your ability to convert more later, depending on your policy terms.

Which Permanent Policies Can You Convert To?

When you convert, you must choose from the permanent life insurance products offered by the same company that issued your term policy. You cannot shop around and convert to a policy from a different insurer. The available options depend on what your insurer sells.

Here are the most common types of permanent life insurance available for conversion.

• Whole life insurance. This provides a guaranteed death benefit and builds cash value at a guaranteed rate. Premiums stay the same for life. This is the most common conversion option.
• Universal life insurance. This offers flexible premiums and a death benefit that can be adjusted. Cash value grows based on a declared interest rate. Premiums can vary from year to year.
• Indexed universal life insurance. This ties cash value growth to a stock market index, with a floor that protects against losses. It has more growth potential but also more complexity.

Some companies may limit your conversion options to specific products or plans. A few insurers only allow conversion to their most basic whole life policy. Ask your insurer for the full list of products available for conversion before making a decision.

When Conversion Makes Sense vs. Buying a New Policy

Conversion is not always the best choice. Sometimes buying a brand-new permanent policy from any insurer gives you a better deal. The right choice depends on your health, age, and financial situation.

Conversion makes the most sense when your health has declined. If you have developed a serious health condition since buying your term policy, conversion is often your best or only option. The insurer cannot deny your conversion or charge you more based on your current health.

Buying a new policy may be better if your health is still excellent. You can shop multiple insurers and compare rates. A new policy with a fresh medical exam might offer lower premiums than a converted policy, especially if you qualify for the best health rating.

Consider running the numbers both ways. Get a conversion quote from your current insurer and compare it to quotes from other companies for a new permanent policy. A licensed insurance agent can help you make this comparison.

Step-by-Step Conversion Process

Converting your term policy to permanent coverage is straightforward. Here are the steps to follow.

• Step 1: Review your term policy. Find the conversion provision in your contract. Note the deadline, any age limits, and whether partial conversion is allowed.
• Step 2: Contact your insurance company. Tell them you want to exercise your conversion privilege. Ask for a list of permanent products available to you.
• Step 3: Compare the permanent options. Look at premiums, cash value projections, and policy features. Decide how much of your coverage you want to convert.
• Step 4: Consider getting quotes for new policies. If your health is good, compare the conversion cost to what you could get from other insurers with a new application.
• Step 5: Complete the conversion paperwork. The insurer will provide forms to fill out. This is simpler than a new application because there are no health questions.
• Step 6: Pay your first premium. Once the paperwork is processed and you pay the first premium, your permanent policy takes effect. Your term policy ends at the same time.

The entire process usually takes two to four weeks from start to finish. There is no waiting period for the permanent coverage to begin. Your death benefit continues without any gap.

Common Mistakes to Avoid When Converting

Converting your term policy seems simple, but there are common mistakes that can cost you money or coverage. Here are the ones to watch out for.

• Missing the conversion deadline. This is the most serious mistake. Once the deadline passes, you lose the right to convert forever. Set a reminder well before your deadline.
• Waiting too long. Even if you are within the deadline, waiting increases your cost. Premiums are based on attained age, so every year you wait means a higher premium.
• Not comparing options. Do not convert blindly. Compare the cost of conversion to the cost of buying a new permanent policy, especially if your health is still good.
• Converting more than you can afford. Permanent premiums are much higher than term premiums. Make sure you can handle the new payment for the rest of your life before converting.
• Not reviewing the permanent policy carefully. Make sure you understand the new policy's features, fees, and surrender charges before completing the conversion.
• Assuming all term policies have conversion privileges. Not every term policy includes this feature. If conversion is important to you, check for it before buying a term policy.

Who Should Consider Converting Their Term Life Insurance?

Conversion is not the right choice for everyone. Here are the people who benefit the most from converting their term life insurance to permanent coverage.

• People whose health has declined since buying their term policy. They can lock in permanent coverage without a medical exam.
• Parents of children with special needs who want lifelong coverage to fund a special needs trust.
• High-net-worth individuals who need permanent coverage for estate planning or estate tax purposes.
• Business owners who need permanent life insurance for buy-sell agreements or key person coverage.
• Anyone whose term policy is approaching its expiration date and who still needs coverage.

Tax Implications of Converting Your Policy

Converting your term life insurance to a permanent policy is generally a tax-free event. The IRS does not consider a conversion to be a taxable transaction. You do not owe income tax when you convert.

The death benefit of your new permanent policy remains income tax-free to your beneficiaries, just like your term policy's death benefit. However, the death benefit may be included in your taxable estate for federal estate tax purposes if you own the policy when you die.

If estate taxes are a concern, you may want to combine your conversion with an irrevocable life insurance trust. This can remove the death benefit from your taxable estate. Consult a tax advisor or estate planning attorney for guidance specific to your situation.

How to Find Out If Your Term Policy Has a Conversion Privilege

If you are not sure whether your term life insurance has a conversion privilege, there are several ways to find out.

• Read your policy contract. Look for a section labeled "Conversion Privilege" or "Conversion Option." It will describe the rules and deadlines for converting.
• Call your insurance company. Customer service can tell you whether your policy includes conversion and explain the specific terms.
• Ask your insurance agent. If you bought your policy through an agent, they can pull up your policy details and explain your conversion options.
• Check your online account. Many insurers allow you to view your policy documents online. Log in to your account and look for the conversion details.

If you are shopping for a new term life insurance policy, make sure conversion is included. This feature gives you flexibility in the future. Some policies include it at no extra cost. Others may charge a small additional premium for it.

Key Takeaways

The conversion privilege is a powerful feature that gives term life insurance policyholders the option to switch to permanent coverage. It is especially valuable when your health has changed and you can no longer qualify for new coverage through traditional underwriting.

The most important thing is to know your conversion deadline and not miss it. If you think you might want permanent coverage someday, review your policy now so you know your options. Talk to a licensed insurance agent if you need help deciding whether conversion is right for you.

Remember that conversion is not free. Your premiums will go up significantly. Make sure you can afford the new payment before converting. If your health is still good, compare conversion costs to quotes for new permanent policies from other insurers. The best choice depends on your individual circumstances.