What Is Conversion?
Conversion is a feature available with many term policies that allows you to convert some or all of your “term” death benefit to a whole life policy. You may be able to choose whether that policy is whole or universal life, or you may only be given one option. Converting term to whole life insurance creates a new and separate life insurance policy.
When you convert a life insurance policy, you don’t need to reapply for coverage or provide evidence of insurability—meaning that even if you’ve developed one or more health issues, the rate you’ll pay is based on the state of your health when you applied for the original term policy, as well as your current age.
If you only convert part of the death benefit to a permanent policy, the death benefit and premium on your term policy will also decrease. However, the net premium you’ll pay for the same amount of coverage will increase because permanent policies cost more. Also, some insurers may limit you to one partial conversion, as opposed to letting you convert portions of your coverage multiple times over a number of years.
For example, if you had a $500,000 term policy and were allowed one partial conversion, you could convert a portion, such as $250,000, into permanent coverage, with $250,000 remaining as term coverage. Then, if you wanted to increase your permanent coverage with an additional term conversion, you would need to convert the entirety of the remaining $250,000 to permanent life insurance.
Depending on your policy, the conversion period may be limited to a certain timeframe, such as 10 years after policy issue or before age 65.
When is the best time to Convert?
“The ideal time to convert is a highly subjective dynamic since there are often many reasons why you convert, how much, and when,” explained Brian Haney, Maryland-based financial advisor and vice president of The Haney Company, in an email to The Balance.
Haney explained that the most common reasons for conversion are financial. For instance, younger professionals with competing financial priorities may purchase “the right amount of insurance protection with a term policy,” Haney said. “Then, as cash flow improves, [they] systematically convert portions to whole life, often buying a stated death benefit amount to fit, say $100/month of premium.” As noted above, this strategy only works if your policy allows multiple conversions.
In this case, when only a portion is converted, the term policy remains active until the term expires or the remainder is converted, with a reduced premium to account for the reduction in coverage. However, keep in mind that you’ll be paying more, in total, for the same amount of coverage.
Though it’s less common, Haney also noted that some people convert as they near the end of their term coverage (or the window for conversion) upon realizing they want to continue coverage or build cash value.
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How to convert term to whole life Insurance
Most policies allow term life to be converted to whole life or universal life insurance, and one of the benefits of conversion, according to Haney, is that “there should be no medical element so they cannot deny you if your health has changed.”
The process for conversion is detailed below.
- Contact your insurance agent or company. They should be able to help you determine whether your policy is eligible for conversion, and if there is a conversion deadline. Though, ideally, you should know whether your policy is eligible for conversion and what the limits are on converting before you purchase the policy..
- Complete the application. Haney explained that this should be a relatively short and simple process, but “even though there’s no medical [exam] involved, there is still a change to the policy itself, often generating a new policy—so there is some processing time on the part of the insurance company.”
- Start paying for the new coverage. “[Once the application is processed], you should be all set and can start paying for the new coverage however you’d prefer.
Warning: Conversion isn’t for everyone. Keep in mind that insurance agents make a commission when you convert. If your insurance agent or company is pressuring you to do so, make sure it’s in your best interest.
Converting term life to whole life insurance can allow you to access the benefits of both types of life insurance when you need them. It’s a more expensive proposition for the same amount of coverage, but you can build a cash value in the permanent policy and continue coverage once the term insurance expires. While a conversion will not serve all policyholders well, knowing that you have the option to convert a term life policy in the future can help you make better decisions now and down the line.