Converting Your Term Life Insurance to Whole Life Insurance

Is it the right financial move for you?

Senior couple (60yrs) paying bills at home

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One strategy that life insurance companies may use to earn more is to try and convince you to convert your term life insurance into a whole life insurance policy. The tactics vary, but they could include phone calls regarding the changes in your policy or letters about how you are nearing the deadline for your term life insurance policy. The wording could make it sound like you need to make the changes or you risk losing coverage.

If this is the case—or if you've just been thinking about making the switch from term to whole—it's smart to review the life insurance that you currently have to see if you need additional coverage or not. Learn whether converting your policy if a good idea and smart financial move.

Term vs. Whole Life Insurance

Before you convert from term to whole, it's important to understand each type of life insurance policy.

Permanent Life Policies

Whole life policies are part of a category of insurance policies that include universal life, variable universal life, and indexed universal life. When you convert to a whole life policy, you're converting to a permanent life insurance policy with different options than the other plans in the category.

Term Life Insurance

Term life insurance is life insurance that covers a specific period of time. Generally, policies cover you for 10 or 20 years, but you can find other terms for the policy. You will pay the premiums for the length of the term, and if you die, your loved ones will receive the policy amount. If you do not die during the term, when the term ends, you do not receive anything.

Key factors of term life insurance include:

  • Lower premiums, but coverage only for a limited period of time
  • Not a good option if you have a preexisting condition that would make qualifying for insurance difficult
  • Need to purchase coverage that will last as long as you need to bring in income

The cost of term insurance is much lower than what you would pay for a whole life policy.  

Whole Life Insurance

Whole life insurance is an insurance policy that you pay into for your entire life. It does not end after a certain number of years and as long as you continue to pay your premiums your loved ones will receive the benefit when you die. It also allows you to cash out the policy and then take the money that has been invested and use it for other things. The rate of return on these benefits is lower than other investments, and the premium costs are higher than term life insurance. 

Key factors of whole life insurance include:

  • Covered for life, though premiums may be more expensive than term
  • You can cash out the policy for things like school or retirement
  • Rate of return is usually lower than what you would receive if you invested the money

Is It a Good Idea to Convert Term to Whole Life Insurance?

Whole life insurance comes with monthly premium costs that are quite a bit higher each month. And while you do build cash in the policy, the rate of return on whole life insurance policies isn't that great. It's often touted as an investment, but if you don't plan to cash out some of the money in the future, you may never see any of the returns. Plus, if you're paying higher premiums, you may have limited cash for other investments, like stocks or exchange-traded funds (ETFs).

Depending on how you plan to use the whole life insurance policy, term life insurance may be the better option. This offers the lowest monthly premium, which can make it easier for you to get all of the coverage you need for your family. Converting your policy will mean paying higher premiums, which could put constraints on your monthly budget, but it would also cover you for life.

Is Whole Life Better Because of Its Cash Value?

Most people will pay their life insurance premiums each month without fail but may move their investments to the back-burner or put off saving for retirement when things get tough financially. Professionals in the industry believe that it is better to have a whole life insurance policy because at least you are regularly investing the money.

While it may be the case that you do put off investing when you are out of work or you need to cover an unexpected bill, you will still be better off investing the money yourself. If money gets really tight, you may no longer be able to afford the premiums for a whole life insurance policy, while you can afford to cover the term life insurance premiums even when you are unemployed.

Instead of using a whole life insurance policy make it a priority to invest the difference into either a retirement or investment account and you may come out ahead.

Contact a financial advisor and see a comparison of what would happen if you invested the difference in the market and compare it to the amount that you would cash out. Set up an investment plan instead of purchasing the whole life insurance, and be sure to have adequate coverage for your needs. 

How Do I Handle a Pushy Agent?

Frankly, if your life insurance agent keeps trying to have you change policies after you have explained your reasoning behind wanting term only, you may need to look for another insurance agent that will listen to you. Insurance agents work on commission, which may be why they want to switch you over to a new policy. However, if you feel like an agent is too pushy, you do have the right to shop around when you are ready to purchase a new policy.