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How Term Conversions Work

May 11, 2022
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Term insurance policies are only designed to last a certain length of time, called a term. Once that period ends, so does the coverage.

Policyholders can then choose to extend coverage after a term ends by either 1) purchasing a new policy or 2) converting a qualified term insurance policy to a permanent life insurance policy.

Converting to a permanent life insurance policy (such as a whole life policy or universal life policy) is an ideal option if you decide you want financial protection for the rest of your life.

What is a term conversion?

A term conversion is when you choose to change, or convert, your term life insurance policy into a permanent life insurance policy. You can convert without being required to prove your insurability.

A policy that is convertible will have a term conversion rider. Many term life insurance policies have this rider automatically added on.

Does a term conversion option expire?

Yes, the option to convert your term policy does have an expiration date.

You can choose to convert as long as it is within the term conversion period stated in the policy. The expiration period of a term conversion rider can vary depending on the life insurance company.

Some term conversion periods don’t expire until the term policy expires. Some policies state that the term conversion option is only available within the first 5 or 10 years. Be sure to look at the fine print in your policy or ask your agent.

How do term conversions work?

You can convert your term policy into one of the insurance company’s permanent policy options during the conversion period by filing out a conversion form. You won’t need to go through underwriting again, but your age is factored in when converting.

There is no fee to convert, however, your premiums will increase. Instead of owning a term life insurance policy, you’ll now own a permanent life insurance policy. A permanent life insurance is typically 10-15 times more expensive than its term counterpart.

When you convert, you’ll convert based on your current age (called attained age) or your age at the time you took out the term policy (called original age).

If you convert based on your current, or attained, age, the cost of insurance will be more expensive, but you will not have to pay a lump sum at the time of issue.

If you convert based on original age, you will have to pay all back premiums and interest when you convert, but the yearly cost of insurance will be cheaper.

A conversion option allows you to convert no matter your current health status. Whatever risk class you were given when you bought the term life insurance policy is the risk class you’ll have for the permanent life insurance policy.

 

Example of Converting

You’re 50 years old and are diagnosed with heart disease. You decide to convert your term life insurance policy into a permanent policy.

When you purchased the policy at age 30, you were assigned the Preferred risk class.

Even though you now have heart disease, your risk class when you convert into a permanent policy will remain Preferred.

What is a partial term conversion?

A partial term conversion is when you take a portion of your term policy and convert it to a permanent policy. In doing so, you actually create two separate policies.

With a partial conversion, your term policy’s new premiums then reflect whatever coverage amount is left on your term policy.

Example of a Partial Conversion

You have a $500,000 20-year term life insurance policy. The monthly premiums are $20.

You’ve owned it for 9 years and are still within the company’s 10-year conversion deadline.

You decide to convert $50,000 into a permanent life insurance policy.

You now have two separate life insurance policies: a $50,000 permanent policy that provides lifelong coverage and a $450,000 term policy with 11 years of coverage remaining.

The monthly premiums for the term policy drop to $18. The permanent policy’s monthly premiums cost $100.

The main reason you would do a partial term conversion is if you could not afford to convert the full amount or don’t need the full amount converted to a permanent policy. Keep in mind if you do a partial conversion, your term policy must still meet the plan’s minimum face amount.

Example of Minimum Face Amount Conversion

You have a $200,000 term policy with a minimum face amount of $100,000.

If you convert $150,000 of the term to a permanent policy, you would lose your term policy entirely because the remaining $50,000 is not enough to reach the minimum face amount.

To keep the term policy intact, you could opt to convert $100,000 of the term to a permanent policy so you are left with the minimum $100,000 face amount.

Note: Many life insurance companies give you the option to convert different amounts of your policy at different times. This can help offset the costs of moving from term to permanent insurance. Though, it is important to note that not all life insurance companies allow partial conversions.

See what you’d pay for life insurance

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What are the benefits of a term conversion?

  • You maintain the original health rating from the term policy when you convert, even if you have developed health issues that would normally raise your rates on a new policy or make you uninsurable.
  • You can decide when and how much of the coverage to convert–as long as it’s before the conversion expiration date.
  • You can start building cash value with the new permanent policy.
  • It provides life insurance coverage for your entire lifetime.

Why does this conversion option matter?

Less than 1% of term life insurance policy owners convert their policies. Most people only need term life insurance and the premiums are very expensive when you convert so most choose not to. But for the 1% of people that do convert, those increased payments are worth it.

As mentioned earlier, when you convert a term policy into a permanent policy you are not underwritten again a.k.a. you do not need to prove you’re still insurable. The ones who do convert are people who suddenly find themselves with a shortened life expectancy and likely would be deemed uninsurable if they tried to apply for more life insurance coverage.

These individuals have loved ones that they don’t want to leave suffering under the weight of medical bills and funeral costs. Imagine owning a 20-year term life insurance product and finding out you have an incurable disease just a year or two before your life insurance policy is about to expire. With a conversion option, you could turn that term policy into a permanent policy ensuring that the insurance company writes your family a death benefit check.

The death benefit from a life insurance policy won’t bring you back and it won’t heal the emotional suffering, but it can help ease any financial pain that would have occurred as the result of your sudden death. Yes, the premium payments increase drastically when you convert, but if your time on this earth is limited then the cost is likely worth it.

When you apply for term life insurance on Quotacy.com you will be able to see if the product has a conversion option before you even apply. Most of the insurance companies Quotacy works with do include a conversion option on their term policies—free of charge.

Are there alternatives to converting?

A term life insurance policy doesn’t provide coverage forever. If you want more life insurance coverage, there are alternatives to converting.

Buying a New Policy

Depending on your age and health, if your term policy is set to expire soon, you may be able to buy a new term life insurance policy.

To buy a new term life insurance policy, you’ll have to go through the underwriting process again, but chances are you’ll save a lot of money with this option compared to converting.

Laddering Policies

You may need term life insurance for different financial obligations. To save money, you can choose to buy multiple term policies that expire at different times.

Example of Laddering Life Insurance Policies

Todd, 35, wants life insurance to protect his family’s finances. He wants to make sure the death benefit can replace his income, provide for his children’s college, and allow his spouse to pay the mortgage.

Todd wants to have at least one million dollars in coverage to start but needs less later in life as his children get older and his mortgage loan decreases.

He decides on the following three policies:

Policy #1: 30-year $275,000 term life insurance policy

  • Monthly premiums = $23
  • Lasts until Todd is 65 years old

Policy #2: 20-year $750,000 term life insurance policy

  • Monthly premiums = $29
  • Lasts until Todd is 55 years old

Policy #3: 10-year $500,000 term life insurance policy

  • Monthly premiums = $15
  • Lasts until Todd is 45 years old

Compare to Todd buying one 30-year $1,525,000 term life insurance policy for $95 per month.

Renewing Your Term Policy

Most term life insurance policies give you an option to renew your coverage at the end of the term. Like the conversion option, you do not need to prove you’re insurable in order to renew.

To renew your coverage another year, you need to pay a much higher premium. And every year you choose to renew, the premium increases yet again.

However, for someone who learns they have a terminal illness but their term policy is set to expire soon, the renewability option can be life-saving for their family.

Renewing may be a better option than converting if your life expectancy has suddenly decreased and you only have a year or two left to live.

Summary

If you’re considering converting your term policy into a permanent policy, these are the essential things to know.

  • Whatever risk class you were approved for when you purchased the term policy, you keep when you convert, even if your health has deteriorated.
  • Your current age will be considered when determining your new permanent policy’s pricing, unless you opt for original age and pay a lump-sum.
  • Your policy premiums will be more expensive when you convert into a permanent policy.
  • Some insurance carriers require a minimum amount of coverage to be left on the original term policy if you are doing a partial conversion.
  • Each life insurance carrier has their own restrictions regarding when you can convert. For example, some carriers don’t let you convert within the first five years, some only let you convert within the first twenty years, and some will let you convert at any time.
  • Life insurance carriers set a maximum age for when you can convert. For most carriers, this age is either 65 or 70.

 

Watch the Term Life Insurance Conversion Video

17 Comments

  1. James

    Can I convert a term policy bought prior to the 7702 changes to whole and get the old 7702 whole policy? My company says this only works for original age and not attained age conversion.

    Reply
    • Natasha Cornelius

      Hi James, all carriers are now required to issue new policies, including conversions, based on the new 7702 regulations.

      Reply
  2. Jon

    Is the term insurer obligated to notify the policy holder when the conversion date is approaching?

    Reply
    • Natasha Cornelius

      Hi Jon, an insurer may notify you when you’re eligible to convert and when the expiration date is approaching, but they are not obligated to do so. Many insurers do this as a courtesy to their customers.

      Reply
  3. Ellen

    If you convert your expiring term life to a universal life at age 57, for the amount of 500,000, up until the age of 90, what would the monthly premiums increase to. If it is based on age and no exam is needed. How is the monthly premium determined. Would you have a monthly ballpark amount for the amount above? I know the monthly premium never goes up unless you miss a payment.
    Thanks,
    Ellen

    Reply
    • Natasha Cornelius

      Hi Ellen,

      The monthly premium when you convert is based on what risk class you were originally given, your age, how much coverage you’re converting (full or partial amount), and the product you’re converting to.

      When it comes to universal life insurance there are many factors involved. Is it a Guaranteed UL? Indexed UL? Variable UL? Is there a no lapse guarantee? Is it a short pay scenario? Unfortunately, I can’t give you a simple estimate. However, I asked one of our product specialists to run some quotes to give you an idea of price. He averaged together some quotes for a GUL, guaranteed for life, and an IUL, endowing at age 95, and premiums will run you about $550-600 per month for a $500,000 conversion at age 57 at the best health risk class (Preferred Plus).

      Reply
  4. Scott Luster

    How does an insurance company benefit from allowing the conversion of a term policy to a whole life plan? What’s in it for them?

    Reply
    • Natasha Cornelius

      Hi Scott, only about 1% of term policy owners (or even less than that) actually convert their policies into a permanent policy. The conversion option is typically only taken advantage of by individuals who suddenly find themselves with a much shorter life expectancy and want to keep insurance coverage in place for loved ones. That being said, the insurance company doesn’t benefit too much from a conversion because more likely than not they are going to be paying out a large death benefit check. While the premiums jump significantly when converting from term to whole, if you aren’t going to be living too many more years then it’s worth it to leave your family the guaranteed death benefit that comes with that permanent policy. Doing right by their customers is essentially what insurance companies get out of offering a conversion option.

      Reply
  5. Andy

    Hi Natasha,

    When it comes to selling your term policy may I convert it myself or does a licensed agent or agency have to do this for me?

    Reply
    • Natasha Cornelius

      Hi Andy, if you want to convert your term policy into a permanent policy you just need to reach out to your agent. There is a conversion form they can fill out with you. If you bought directly from an insurance company reaching out to their policy service team would be the best place to start.

      Reply
  6. Kelly

    Great article, very easy to read and understand, simply explained.
    Thanks!

    Reply
  7. Tanya

    Can I just cash out my policy instead of converting it?

    Reply
    • Natasha Cornelius

      Hi Tanya,

      Term life insurance policies do not accumulate a cash value like whole life policies do. Therefore, there would be nothing to “cash out.” If you opt to not convert your term policy, your coverage will simply end at the end of the term.

      If you purchased a return of premium term policy, then you would get back all the premiums you paid at the end of the term. This is different than a “normal” term policy and does cost more. Thanks for your question!

      Reply
  8. Kathy Carney

    Can you ask for a 1035 exchange so the cost basis from the term policy transfers over to the new universal life policy?
    Term Conversion

    Reply
    • Jeremy Hallett

      Kathy, great question! The simple answer to your question is YES. When structuring a universal life contract to grow cash for distribution at some point in the future a bigger basis means that you can withdraw more money before taking out loans on the contract. It is a very good idea to 1035 the term into universal life if the purpose of the permanent life insurance is for cash value accumulation and distribution. If the purpose of the permanent life insurance policy is for death benefit only, then a 1035 typically will have no benefit.

      Reply
  9. kenneth

    I like a free term life insurance qoute

    Reply
    • Natasha Cornelius

      Hi Kenneth,

      You can get a free term life insurance quote by click this link: Term Quote Tool. It’ll take you to the quoting tool on our website and it is super easy to use.

      Reply

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