Term life insurance policies only last a set length of time, or term. Once that ends, your coverage ends as well. There may come a time that you decide that a term policy is no longer sufficient for your life insurance needs. Perhaps you only got a term policy to make sure your children would be covered through college if something unexpected happened to you. Now they are grown and you want them to be protected throughout your whole lifetime. This is when a term life insurance conversion would come in handy.
What is a term conversion?
A term conversion is when all or some of your term life insurance policy is converted into a permanent life insurance policy (e.g., a whole life or universal life policy). Most term life insurance policies include a conversion option. This option means that if you decide you want permanent life insurance you can convert regardless of your health as long as you convert before the deadline listed on your policy.
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 now have two separate policies. Not all insurance carriers allow you to do partial term conversions.
The main reason you would do a partial term conversion is if you could not afford the premiums on a full conversion or don’t require 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.
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 lose the remaining $50,000 because it is not enough to reach the minimum face amount.
Pending you are still within the term policy’s conversion expiration date, you can convert the remaining portion into a permanent policy at a later time. You will then have two separate permanent policies versus one term policy and one permanent policy.
When can I convert?
First, be sure to check when your term policy’s conversion expiration date is. Some carriers only allow conversions within the first few years. Others will allow it at any point during the term.
If you decide to convert, allow plenty of time to send in the paperwork for processing. Processing must also be completed before the expiration date. Most carriers do not have conversion grace periods.
What happens when I convert?
Converting from a term to a permanent policy will raise your premiums because permanent insurance is more expensive. However, if you need more insurance converting to permanent will usually be cheaper than applying for a new term policy altogether because at that point your age and health will be taken into consideration. There is the rare occurrence in which applying for a new term policy would be cheaper than converting.
You purchased a $500,000 20-year term policy at age 30 while you were a regular smoker that cost you $72/month. Now, 20 years later, you’ve been tobacco and nicotine free for over 15 years. You could get much better rates reapplying for another term policy (as long as you undergo another medical exam) than you would simply by converting to permanent because you could now be approved for non-tobacco rates.
When you convert your new premiums will be affected by age but you won’t have to prove your insurability (e.g., through medical exams). You have the option to convert either based on your current age (called attained age) or your age at the time you took out the term policy (called original age).
Attained Age Conversion versus Original Age Conversion
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 with your agent which option would be best for you.
You’re 50 years old and are converting your 20-year term 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 carrier 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
Only your financial situation can determine which option is best. Regardless of whether you convert based on attained or original age, you still do not need to go through any further underwriting. Being able to convert to a permanent policy is a great option to have especially in the event that your health deteriorates.
No one ever anticipates needing to use life insurance, but the unexpected happens. Be prepared and get a free and anonymous term life insurance quote today.