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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. You can discuss which option would be best for you with your Quotacy agent.
Example of Converting with Original Age
You’re 50 years old and are converting your 20-year term insurance policy. You convert based on original age.
You purchased your term policy when you were 30 years old, so the underwriters base the price of your new whole life policy off the age 30. This means your premiums are quite a bit cheaper compared to a whole life policy based off your true age of 50.
At time of issue, you need to pay the insurance company an amount equal to the difference in price between the term policy and what the premium payments would have been had you bought a whole life policy in the first place.
20 Years of Whole Life Premium
– 20 Years of Term Premium
= Lump Sum Due to Carrier
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
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.
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.
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
About the writer
Natasha Cornelius, CLU
Senior Editor and Life Insurance Expert
Natasha Cornelius, CLU, is a writer, editor, and life insurance researcher for Quotacy.com where her goal is to make life insurance more transparent and easier to understand. She has been in the life insurance industry since 2010 and has been writing about life insurance since 2014. Natasha earned her Chartered Life Underwriter designation in 2022. She is also co-host of Quotacy’s YouTube series. Connect with her on LinkedIn.