Buying a term life insurance policy gives your family a valuable, if temporary, safety net should something happen to you. But what if your circumstances change or you decide permanent coverage is a better fit?
Depending on your policy, converting term life to whole life insurance may be an option. It’s a way to extend your coverage without worrying about a second medical exam. Here are the key details to know.
Term vs. Whole Life Insurance
Life insurance falls into two main categories: term and permanent. Term coverage is simpler since its sole purpose is to financially protect your beneficiaries when you pass on. Your beneficiaries receive a cash death benefit they can use to pay for your final arrangements, reduce their debt, or replace lost income.
Compared to other life insurance products, term coverage often comes with lower premiums. However, these policies expire after a certain time—usually 10 to 30 years after you buy the contract. If you want coverage beyond that, you typically have to shop around and go through additional medical underwriting.
As the name implies, permanent life insurance—including whole life insurance—provides lifelong coverage for as long as you pay the required premiums. Your payments are generally level throughout the policy, even if your medical condition worsens. These policies also include a savings component you can access during your lifetime for various financial needs. Part of each premium you pay covers the insurance cost, while the remainder helps grow your policy’s cash value.
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Understanding the Term Conversion Rider
Convertible term life insurance allows you to convert your contract to a permanent life insurance policy, such as whole life or universal life, without undergoing a medical exam or providing evidence of insurability. Even if your health declines, you can still get permanent coverage at rates based on your health when you first took out the term policy.
Because they offer lifelong coverage and a cash value component, permanent life insurance premiums are typically higher than term policies with the same death benefit. Even though converting term life to whole life is free in and of itself, your payments are likely to increase after switching.
Deciding to Convert Term to Whole Life Insurance
This conversion feature comes in handy if you initially purchased a term policy but want the flexibility to obtain lifelong coverage later. However, changing your policy to a permanent one only makes sense in certain situations. Here are some factors to consider before making the switch.
1. Health
When your term policy expires, you generally have to renew it—often at a higher premium—or apply for a new one. With most insurers, you must undergo medical underwriting to qualify, which can be difficult if you’ve recently been diagnosed with a medical condition such as heart disease, diabetes, or cancer. The term conversion rider on your policy may be the only way to obtain affordable coverage since you don’t need a medical exam.
For healthier policyholders, however, converting an existing term policy doesn’t always result in better premiums. Compare rates among multiple insurers to see which gets you the best deal.
2. Dependents’ Needs
One of the biggest questions to ask yourself is whether your dependents will continue to need a financial safety net after your term policy expires. If so, converting your term insurance to a permanent life insurance policy is one option you can consider—especially if you need coverage for the foreseeable future. If you only need protection for a few more years, however, you might renew your term policy or shop for a new one, which is usually less expensive.
3. Estate Planning
For more affluent individuals, permanent life insurance can be an important part of your estate plan. Beneficiaries are taxed as much as 40 percent on estates greater than $13.6 million in 2024. The death benefit from your policy gives your loved ones a reliable source of cash to pay the IRS after your passing, so they won’t have to sell your other assets at fire-sale prices.
If you own a business, a whole life policy can also provide a more equitable inheritance among your beneficiaries. For example, say you have one child who will inherit and run the business after your death. You can make other family members the beneficiaries of your permanent life insurance policy to balance out the company’s value.
4. Life Insurance Goals
Another instance when you may want to consider converting your term life policy is if your financial needs change. While term insurance gives your beneficiaries financial support when you’re gone, it doesn’t help you build wealth for yourself. You may decide you want a whole life or other permanent life insurance product to help you build cash value for long-term needs.
5. Budget
Perhaps you couldn’t afford permanent life insurance when you purchased your term policy. If, in the meantime, you find yourself with more room in your budget, lifetime protection might become a possibility.
If you decide to take on a whole life policy, however, ensure you can afford the increased cost—even if you experience a job loss or other financial setback. Should you find you can’t pay the premiums within the first few years of owning the new policy, your coverage could lapse. In addition, you may have to pay a surrender charge that reduces the cash value you get back from your policy.
How to Convert Your Term Life Policy to Whole Life
Term life policies have an eligibility limit for your conversion, which can be a specific number of years or a certain age. For instance, the insurer may allow you to convert the policy within 10 years of buying it or before the policy anniversary following your 75th birthday, whichever comes first. Within that window, most insurers allow you to convert all, or a portion of, the face value from your original term policy.
The process of converting your policy is fairly simple:
- Contact a representative with your insurance company, who will discuss the options for your new coverage and the new premium amount.
- The insurer will give you the required paperwork.
- A medical exam isn’t necessary to perform the conversion. So, while your new premium is based on your current age and the amount you convert, the company uses your health rating when you bought the original term policy.
- The new policy is created.
Securing Long-Term Coverage for the Ones You Love
Converting your term life insurance is often the easiest way to obtain permanent coverage, especially if you’ve developed health complications since taking out your policy. If you’re shopping for a new whole life policy, consider guaranteed issue life insurance that doesn’t require medical underwriting. Contact a Colonial Penn representative to learn more.
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