How to Convert Term to Universal or Whole Life Insurance

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Some term policyholders can convert all or part of their term life insurance to a permanent life insurance policy without having to reapply for coverage. If you have or buy a term policy with a conversion feature, you can take advantage of the lower cost of term insurance when your budget is limited, then convert some or all of it to a permanent life insurance policy later. In this way, you can keep coverage beyond the expiration of the original policy's term, and potentially build a cash value.

Key Takeaways

  • Term life insurance policies only cover death that occurs during the term of the coverage, while permanent policies will cover death whenever it occurs.
  • Some term policies allow the policyholder to convert some or all of their coverage to a permanent policy.
  • Whether or not to convert depends on someone's financial situation, age, and other personal factors.
  • Conversion can be completed by contacting the insurance company and filling out an application.

Term vs. Whole Life and Universal Life Insurance

Term life insurance provides a death benefit in the event you pass away during the term of the policy. It generally lasts between one and 30 years, and you can expect to pay premiums to the insurer for the entire duration. Because it has an end-date, it's usually significantly less expensive than a permanent policy for the same death benefit.

But term life insurance has some downsides. To start, if you’d like to stay insured after the term expires, you will have to purchase another term policy or a permanent one. Since premium costs are based on your age and health, your premiums may go up drastically, especially if your health has gotten worse—if you've developed multiple health issues, you might not be able to qualify for a new policy at all.

Many, but not all, term policies have a conversion feature included at no extra cost. Make sure to read the fine print or ask your agent before buying coverage.

Permanent policies, such as whole life insurance and universal life insurance, are designed to provide coverage for your entire life, as long as you pay sufficient premiums to keep your policy in force. Whole life policies typically require that you pay level premiums on a regular basis, while universal life insurance allows you to skip or delay premium payments as long as the cash value is sufficient to pay for them. Both types are more expensive than a term policy for the same amount of coverage.

In permanent policies, insurers typically charge more than is necessary to pay claims early on. These “excess” payments can build a tax-advantaged cash value, which is used to offset the cost of insurance as the insured person (often the policyholder) ages. You may be able to access the cash value while you are still alive via withdrawals or by “borrowing” from the cash value. However, doing so could reduce the death benefit or even cause the policy to lapse. Still, this benefit can make these policies more attractive than term life insurance for some people.

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 permanent 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 insurance to permanent 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 Does It Make Sense 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.

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.

The Process for Converting Term Life to Permanent 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 fairly simple:

  1. 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..
  2. 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.”
  3. 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,” Haney said.

Some policies may offer conversion credit for premiums paid into the term policy for a certain number of years, such as five.

The Bottom Line

Converting term life to permanent 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.