What is the most important factor to consider when determining whether to convert term insurance?

Choosing the right type of life insurance can be confusing, but it’s also an important decision. Here are some guidelines that can help you narrow down your best life insurance options.

Consider term life insurance if...

• You need life insurance for a specific period of time. Term life insurance enables you to match the length of the term policy to the length of the need. For example, if you have young children and want to ensure that there will be funds to pay for their college education, you might buy 20-year term life insurance. Or if you want the insurance to repay a debt that will be paid off in a specified time period, buy a term policy for that period.
• You need a large amount of life insurance, but have a limited budget. In general, this type of insurance pays only if you die during the term of the policy, so the rate per thousand of death benefit is lower than for permanent forms of life insurance. If you are still alive at the end of the term, coverage stops unless the policy is renewed or a new one bought. Unlike permanent insurance, you will not typically build equity in the form of cash savings.

If you think your financial needs may change, you may also want to look into “convertible” term policies. These allow you to convert to permanent insurance without a medical examination in exchange for higher premiums.

Keep in mind that premiums are lowest when you are young and increase upon renewal as you age. Some term insurance policies can be renewed when the policy ends, but the premium will generally increase. Some policies require a medical examination at renewal to qualify for the lowest rates.

Consider permanent life insurance if...

• You need life insurance for as long as you live. A permanent policy pays a death benefit whether you die tomorrow or live to be over 100.
• You want to accumulate a savings element that will grow on a tax-deferred basis and could be a source of borrowed funds for a variety of purposes. The savings element can be used to pay premiums to keep the life insurance in force if you can’t pay them otherwise, or it can be used for any other purpose you choose. You can borrow these funds even if your credit is shaky. The death benefit is collateral for the loan, and if you die before it’s repaid, the insurance company collects what is due the company before determining what’s goes to your beneficiary.

Keep in mind that premiums for permanent policies are generally higher than for term insurance. However, the premium in a permanent policy remains the same no matter how old you are, while term can go up substantially every time you renew it.

There are a number of different types of permanent insurance policies, such as whole (ordinary) life, universal life, variable life, and variable/universal life. For more details, see our articles on the specific types of policies.

By Carolanne M. Chavanne, CFP

Choosing the right life insurance policy means striking a balance between what you’re able to pay today and what you want to leave your loved ones later down the line. And while price is a big factor, there are other important considerations to make when choosing the right policy for you.  Please give us a call to discuss any of these topics in more detail. 

1. Policy Type

Life insurance types typically fall into two broad categories: term and whole.

Term Life Insurance

Term life insurance offers coverage during a certain period of time - think five, 10, 15, 20+ years. During this time period, you pay a premium and your beneficiaries will receive a death benefit should you die. If the time period ends (and you do not convert or renew the policy), you stop paying the premium and you are no longer covered by the policy.

Whole Life Insurance

Considered more of an investment, whole life insurance covers you from the day you sign up until you die - there is no end date. Over time, your whole life insurance policy builds a cash value, which you can cash out or use as a loan once it’s reached the date of maturity.

Term life insurance is typically more affordable. For those who are just looking to make sure their children are covered until they go to college, going with a term life policy may be all they need. For others looking to make a serious investment and are able to pay more per month, whole life insurance could be beneficial. As you consider various life insurance policies, deciding which type of policy is right for your unique circumstances should be one of your first deciding factors.

2. Tailored Pricing

Life insurance policy prices will vary greatly, both based on policy type, the provider and your unique circumstances. As you’re comparing prices and shopping around, it’s important to look for a policy that takes into consideration a number of factors - your health, smoking habits, travel history and other habits or indicators. The more in-depth the policy gets, the more tailored it will be to you - meaning you could be getting deeper discounts for healthy lifestyle choices or positive habits. Policies that offer more generic or lenient vetting may make up for it with higher premiums.

3. Affordability

Having an affordable policy is important for a number of reasons. The purpose of life insurance is to provide financial security for your loved ones after your passing. That shouldn’t mean, however, that you’re depriving aspects of your financial life today in order to maintain your policy. Find a policy that can fit well within your budget - even when times get tough.

When faced with financial turmoil (job loss, divorce, etc.), a life insurance policy may be one of the first things to go. Keeping it affordable from the start may help avoid this. Additionally, if you cancel or lapse on your policy, you may face an uphill battle getting another one - especially if your health has declined in any way.

4. Option to Convert Policy

Say you hit the final year or two of your term life insurance policy, but you’d like to keep it going. Some term life insurance policies offer a conversion feature, which allows you to convert the policy into a permanent one.

One major advantage of having this feature is that you avoid having to go back to the market place and start your policy search all over again. If it’s been 20 or 30 years since you initially bought your policy, you may have developed health conditions that could make it harder to obtain a new policy.

5. Living Benefits

It’s important to find a life insurance policy that can offer you certain benefits while you’re still living. Some policies allow you to take premiums already paid back out to cover medical expenses, care, cancer treatments, etc.

Remember that any funds you take back out of your policy will lessen the amount your beneficiaries receive. However, this option could save you and your loved ones from financial turmoil in the event you fall ill or become incapacitated.

You want to know your loved ones are going to be well-cared for in the event that you pass away unexpectedly. Taking the extra time now to look at your options and choose something that’s right for you can make a big difference in how your policy benefits you and your family later down the line. If you’re working with an agent or financial advisor, ask them to help you review your options thoroughly.

Term life insurance only covers you for the set number of years that your policy stipulates – usually between 10 and 30. As you near the end of your policy term, you may realize that you want your coverage to continue. The good news is, you may not have to start over and purchase a brand new policy. Instead, you may be able to convert your term life insurance into whole life insurance without new evidence of insurability.

If you’re considering converting your term life insurance policy to whole life insurance, we set out some steps you can take and outline who may benefit from converting their policy.

Term vs. whole life

With term life insurance, the policyholder chooses a period of time over which their policy is active – usually between 10 and 30 years. The policyholder pays premiums until the end of the term. If they die within the policy term, their beneficiaries receive the death benefit. If not, the policyholder is left without coverage when the term ends.

Whole life insurance, on the other hand, is a permanent policy. With whole life insurance, you pay the same premium amount until you pass away. Over time, the premium payments can accrue cash value which can accumulate interest or returns. You can typically take out loans against this money or make withdrawals before you pass away. However, if you do decide to borrow against your policy, the amount you borrow may reduce the face value of the policy, and your beneficiary will receive a lower payout if you do not pay back your loan.

What happens to term life insurance at the end of the term?

You may be wondering, “what happens to term life insurance if you outlive the term?” If you outlive your term life insurance policy, the premiums you paid are kept by the life insurance company, and your coverage ends unless you make arrangements in advance to convert or extend it if that option is available. For example, if your term ends on February 21, 2021, and you pass away on February 24, 2021, without doing anything to convert or extend your policy, your loved ones will not receive any death benefit because the policy ended.

How to convert term life insurance to whole life insurance

Knowing how to convert term life insurance to whole life insurance may help you if you decide you still want coverage after outliving your term life insurance policy.

1. Talk to your insurance company about what types of permanent life insurance are available and the conversion cost.
2. Fill out a life insurance conversion application.
3. Choose the amount of life insurance you’d like in the conversion.
4. Choose how you’d like to be billed for premiums (annual, quarterly or monthly).
5. Enter bank account information if you’re setting up automatic withdrawals.
6. Assign beneficiaries. Don’t forget to include their Social Security numbers.
7. Sign the application.
8. Mail, fax or upload the application.

Reasons to consider converting from term to whole life

Whole life insurance provides a few additional benefits beyond the death benefit that term life insurance provides. If you’re considering converting your term policy to a whole life policy, you may want to consider the following characteristics.:

With permanent life insurance:

• Part of your premium will go towards building a cash value account: When you convert a term life product, you’ll add a second feature — a cash value account. You can typically borrow money from a whole life insurance policy after enough cash value has accrued.
• Your policy won’t expire: A whole life insurance policy is permanent, meaning you’ll pay the same premiums and maintain coverage for the rest of your life unless you stop paying your premiums.
• You’ll lock in premiums for life: Since a whole life insurance policy doesn’t expire, whatever the premiums you agree to will be the same for life. You’ll know what you’re paying for the rest of your life.

What is a conversion clause?

A conversion clause is a section of most life insurance contracts that allow policyholders to convert their term life insurance policy to a permanent form of life insurance. Conversion clauses are valuable because they allow a policyholder to maintain coverage without presenting new evidence of their insurability.

“The way I would describe it is when someone purchases term, in essence they are leasing insurance with an option to buy,” Patrick Bowen, vice president and senior account manager for Legal & General America life insurance says. “The convertibility clause is your chance to convert without new evidence of insurability. But if you aren’t paying attention and forget to convert within your allotted time, you are out of luck.”

The conversion clause allows heads of household, for a price, to transform their temporary insurance into permanent life insurance without having to requalify or undergo physical examinations.

Not all policies have a conversion clause, and policies that do have conversion clauses generally cost more. However, the conversion clause can be worth the extra expense, Vogel says. Sometimes paying a conversion cost is better than going without coverage when your term policy ends.

How it works

Let’s say a woman has a 20-year term policy with a 10-year conversion clause. Nine years into her contract, she develops heart disease, diabetes or some other health problem.

Because she is still within the 10-year conversion period, she can convert her term life insurance policy to a permanent one. By converting to a permanent policy in time, she would not need a new physical exam and would be eligible for coverage through a permanent policy that might otherwise be difficult to obtain without the option to convert her existing policy.

If the policy had been written without a conversion clause, she would face an expiring policy and potentially high renewal premiums.

Review your policy on an annual basis

To make sure the conversion window doesn’t sneak up, you may want to review your policy with an agent on an annual basis.

The development of a health problem is not the only reason to convert a policy. As a rule, the older you are, the more expensive you are to insure. If you can begin paying toward a permanent policy while in your 20s, the monthly premium will be much lower than someone in their 50s would pay.

And your financial needs may change as you get older. You may need a policy with a sizable death benefit to replace your income and provide for three small children, but having such a large policy may no longer be as important after you pay down the mortgage and the children grow up.

Frequently asked questions

What is the best life insurance company?

The best life insurance company is different for everyone as it depends on individual preferences and needs. One of the easiest ways to find the best life insurance company for you is to speak with an independent insurance agent and discuss your policy needs. Once you’ve decided on a policy, you may want to generate a few life insurance quotes online from multiple providers. That way, you can make sure you’re getting the right policy at the right price.

Is term life insurance better than whole life insurance?

Term life insurance is a better option for some people, and whole life insurance is a better life insurance for others. Term life insurance can be a great option for those who want affordable premiums for only a specific period of time. For instance, if you only want coverage while your children are young and financially dependent on you, term life insurance could be a great option.

Should you get life insurance for your child?

Whether or not you get life insurance for your child is a personal decision. Getting life insurance for your child early on can help their insurability later in life. If your child were to develop a health issue down the line, they may have more affordable rates by locking in a cheaper premium earlier in life.