What is a term conversion & what are its benefits?
Most term life insurance policies include a term conversion feature. This option allows you to convert some or all of your term life coverage into a permanent life insurance policy without having to go through another medical evaluation. The new policy is approved at the same health rating you received on your original term life policy.
Life insurance terms you should know
Beneficiaries: The people you name on your life insurance policy to receive the lump sum of money — also known as the death benefit — when you die.
Cash value: The portion of a permanent life insurance policy’s monetary value that grows tax-deferred over the life of the policy.
Death benefit: The amount of money the life insurance company will pay your beneficiaries when you die.
Face amount: The dollar amount, or death benefit, your beneficiaries receive if you die while your life insurance policy is active.
Insured: The person who is covered by the insurance policy.
Policy: The legal document that includes the terms and conditions of your life insurance contract.
Policyholder: The person who owns an insurance policy. Usually, this is the same person as the insured.
Permanent life insurance: A type of life insurance that lasts for the rest of your life and usually includes a cash value account.
Premium: The amount you pay your insurance company to keep your coverage active. Premiums are typically paid monthly or annually.
Riders: Add-ons to a life insurance policy that provide more robust coverage, sometimes for an extra cost.
Term life insurance: A life insurance policy that lasts for a set number of years before it expires. If you die before the term is up, your beneficiaries receive a death benefit.
Underwriting: The process where an insurance company evaluates the risk of insuring you and determines your final rate.
Keep in mind that each insurance company has different guidelines on which types of permanent life insurance policies you can choose from, and when you can exercise the conversion feature.
For example, some insurers might allow you to convert to whole life insurance coverage, universal life insurance coverage, or both.
Your insurer will also indicate the eligibility period for conversion in your policy documents. This is usually either a set number of years, or the end of your level premium period.
A common example is, if you bought a 20-year term life policy, you can convert your coverage at any point within the 20 years or up until age 65, whichever comes first.
Typically, term conversion is quicker and easier than applying for a separate policy.
How much does a term conversion cost?
When you convert your term life insurance policy to a permanent life insurance policy, there’s no cost to the conversion process itself.
You’ll receive a new rate for your updated coverage, which the insurer sets using your current health rating, your current age, and the coverage amount on your updated permanent policy.
Even if you’ve had a change in health, your new policy will be approved at the same health rating that you received on your original term life policy.
However, it’s likely that your updated permanent coverage will be more expensive than your term life coverage for a few reasons.
First, permanent life insurance is more expensive than term life insurance because it doesn’t expire. As long as you keep paying the premiums, it lasts for the rest of your life.
Additionally, life insurance premiums increase year over year by an average of 8%, because as we age, we become riskier to insure. Since your permanent policy will be priced based on your age at the time of conversion, the longer you wait to convert, the more expensive the coverage will be.
To help offset the cost, you can convert a portion of your term life policy instead of converting the full coverage amount. If you choose this option, you can keep the remainder of your original coverage as a term life policy, or you can cancel it.
For example, let’s say you have a term life policy with a $500,000 coverage amount.
If you choose to convert half of your coverage, you would have $250,000 in permanent life insurance coverage.
You could then keep the remaining $250,000 active until the end of your original term, or you could cancel it with no penalty.
Before converting your policy, it’s important to consider your budget before making any changes. This will help prevent your coverage from lapsing due to non-payment, which would leave your loved ones without the financial protection you intended for them.
Our team at Policygenius can help you determine the exact cost of your conversion options. After that, we can come up with a solution that fits your needs while staying within a comfortable budget.
How to convert your term policy
Once you’ve decided that you want to convert your term life insurance policy, the conversion process is simple. You won’t need to undergo a medical exam — you’ll just need to fill out the necessary paperwork for your insurance company and submit the required forms to be processed.
Policygenius can help you:
Determine which forms are required from your insurer
Fill out the necessary paperwork correctly
Send your forms to the right office
Ensure the paperwork is processed efficiently and without errors
Handle any additional requests from your insurer during the conversion process
When does it make sense to do a term conversion?
Your budget has changed
Many people buy term life insurance because it allows them to get the coverage they need at a price they can afford. You may find that your income has increased or your expenses have decreased since you bought your original policy.
If your cash flow has improved since you bought your term life policy, it may make sense to convert to a permanent life insurance policy.
Your health has changed
If your health has changed since you bought your original term life policy, you might not qualify for a new one. If you do qualify, a new policy might be approved at a lower health rating, which might lead to higher premiums.
One of the main benefits of term conversions is that your new policy is guaranteed to be approved at the same health rating you received on your original term policy. Your premiums won’t be impacted by any negative changes in your health. In this situation, it may make sense to convert to a permanent policy.
You have dependents
If you have dependents who rely on your income (such as a spouse, partner, child, or aging parent), you may need coverage beyond the length of your original term. Alternatively, if you have dependents who require lifelong care (like a child with special needs), you may need coverage that won’t expire, so you can guarantee funds to support them when you’re gone.
Converting your term life coverage to permanent coverage can give you the peace of mind that regardless of how old you are when you pass away, your beneficiaries will be taken care of.
Learn more about buying life insurance for a child with a disability
You want to leave an inheritance to your loved ones
Many people use life insurance to leave a legacy to their loved ones. Since term life insurance only lasts for a certain period of time, converting to a permanent policy can guarantee that you’ll leave a legacy to your family, regardless of how old you are when you pass away.
After your death, the insurer pays the life insurance proceeds directly to your beneficiaries. Many other assets must go through probate court, which can be an expensive, time-consuming process. Additionally, anyone can make a claim to the assets during the probate process.
Life insurance provides an efficient and cost-effective way to ensure your loved ones can claim the funds you’d like to leave. If leaving an inheritance is important to you, you should consider converting to a permanent policy.
You want to leave funds to cover final expenses
According to the National Funeral Directors Association (NFDA), the median cost of a funeral was $8,300 in 2023. Permanent life insurance can guarantee that your loved ones will have the funds to pay for end-of-life expenses, including any funeral arrangements. [1]
What happens if you don’t convert your term policy?
At the end of the level term period, most policies will allow you to renew your coverage on an annual basis, up until you reach a certain age (for example, age 90). If you decide to keep your policy after your initial term, your premiums will increase significantly with each year you renew.
Generally, unless you only need life insurance coverage for another year or two, it usually doesn’t make sense to renew your coverage at this point. Because of the steep increase in premiums, most people choose to cancel their term life policy once they reach the end of the level term period.
What are the alternatives to a term conversion?
If you’re relatively healthy, it might make more sense to purchase a new life insurance policy instead of converting your term policy. If you go this route, you’ll need to complete a new application and go through the underwriting process again, which could include a medical exam.
Purchase a new permanent life insurance policy. Each insurance company has different permanent life insurance options, and you may find that the specific type of policy you want isn’t available for conversion.
Purchase a new term life insurance policy. You need life insurance coverage that lasts longer than your current term policy but don’t need the coverage to last your entire life.
If you still have questions about term conversions and whether or not this option makes sense for you, call us at (800) 741-7973 and one of our agents will be happy to help.
