Term life insurance policies only last a set length of time, or term. Once that ends, your coverage ends as well. There may come a time that you decide that a term policy is no longer sufficient for your life insurance needs.
Perhaps you only got a term policy to make sure your children would be covered through college if something unexpected happened to you. Now they are grown and you want them to be protected throughout your whole lifetime. This is when a term life insurance conversion would come in handy.
What is a term conversion?
A term conversion is when all or some of your term life insurance policy is converted into a permanent life insurance policy (e.g., a whole life or universal life policy). Most term life insurance policies include a conversion option for free. This option means that if you decide you want permanent life insurance you can convert regardless of your health as long as you convert before the deadline listed on your policy.
Benefits of a conversion option:
- You maintain the original health rating from the term policy when you convert, even if you have health issues or become uninsurable.
- You can decide when and how much of the coverage to convert (as long as it’s before the conversion expiration date.)
- You can start building cash value with the new permanent policy.
- You can opt to have life insurance coverage for your entire lifetime.
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What is a partial term conversion?
A partial term conversion is when you take a portion of your term policy and convert it to a permanent policy. In doing so, you now have two separate policies.
You have a $500,000 20-year term life insurance policy. You’ve owned it for nine years and are still within the company’s 10-year conversion deadline. You decide to convert $50,000 into a permanent life policy.
You now have two life insurance policies: a $450,000 term policy with 11 years left, and a $50,000 permanent policy that provides you lifelong coverage.
If you only convert a partial amount, your new term policy premiums then reflect whatever coverage amount is left on your term policy. For example, if you were paying $20 per month for a $500,000 term insurance policy and then you decide to convert $250,000 to a permanent policy, your term premiums will then drop to $13 per month, the cost of having a $250,000 policy.
The main reason you would do a partial term conversion is if you could not afford the premiums on a full conversion or don’t require the full amount converted to a permanent policy. Keep in mind if you do a partial conversion, your term policy must still meet the plan’s minimum face amount.
You have a $200,000 term policy with a minimum face amount of $100,000. If you convert $150,000 of the term to a permanent policy you lose the remaining $50,000 because it is not enough to reach the minimum face amount.
Many companies give you the option to convert different amounts at different times. This can help offset the costs of moving from term to permanent insurance. Though, it is important to note that not all life insurance companies allow partial conversions.
A term conversion is when all or some of your term life insurance policy is converted into a permanent life insurance policy (e.g., a whole life or universal life policy).
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How a Term Conversion Works
Each term conversion rider has an expiration date. This expiration date varies by company and product. You have until this expiration date to convert your term policy into a permanent policy without needing to go through underwriting again; however, your age will be considered.
You have the option to convert either based on your current age (called attained age) or your age at the time you took out the term policy (called original age). If you convert based on your current, or attained, age, the cost of insurance will be more expensive, but you will not have to pay a lump sum at the time of issue. If you convert based on original age, you will have to pay all back premiums and interest when you convert, but the yearly cost of insurance will be cheaper. You can discuss with your Quotacy agent which option would be best for you.
You’re 50 years old and are converting your 20-year term policy. You convert based on original age. You purchased your term policy when you were 30 years old, so the underwriters base the price of your new whole life policy off the age 30. This means your premiums are quite a bit cheaper compared to a whole life policy based off your true age of 50.
At time of issue you need to pay the insurance carrier an amount equal to the difference in price between the term policy and what the premium payments would have been had you bought a whole life policy in the first place.
20 Years of Whole Life Premium
– 20 Years of Term Premium
= Lump Sum Due to Carrier
Converting from a term to a permanent policy will raise your premiums because permanent insurance is more expensive. However, if you need more life insurance and have since developed health issues, converting to permanent will likely be cheaper than applying for a new term policy altogether because at that point your health will be taken into consideration.
Another difference—other than the cost—between term and permanent life insurance is how much coverage you typically need. With term insurance, you are usually aligning your term length in time with the years of your life in which you have the most debt, e.g. a mortgage, raising children, college tuition, etc. If you end up wanting to convert into permanent insurance, you likely won’t need as much coverage. Your children may be near adulthood and your mortgage is much closer to being paid off.
» Calculate: Life insurance needs calculator
Let’s take a look at some examples to get a better grasp of term conversions.
Jane Smith purchased a $1,000,000 20-year term policy at age 30 when her son was 5 years old. At age 35, she is diagnosed with breast cancer. Her doctors are optimistic, but she does not want to risk a recurrence happening later on in life after her term policy terminates.
Because her policy has a term conversion option, her medical diagnosis does not matter since she does not have to prove insurability. She decides to convert $250,000 into a permanent policy.
She now has a $750,000 term policy (with 15 years left until it terminates) and a $250,000 permanent policy which she will have her entire lifetime to ensure her son will be financially stable, have the funds to pay for any medical bills she may accumulate, and cover the cost of a funeral when she dies.
John Doe is 27 years old and has a 30-year $250,000 term policy through Insurance Company ABC. He purchased it mainly to cover his funeral costs and mortgage so his wife would not be left covering these expenses by herself if John dies prematurely.
At age 35, he and his wife have their first child. He then decides to convert $50,000 into permanent insurance to ensure there will be funds available for his child in the future. He now has a $200,000 term policy (with 22 years left until it terminates) and a $50,000 permanent policy.
At age 37, he and his wife have a second child. He decides to convert another $50,000. He now has a $150,000 term policy (with 20 years left) and two separate $50,000 permanent policies.
Eliza Johnson purchased a 20-year $250,000 term life policy when she was 30 years old. At the time, she was overweight and had adult onset Type 2 diabetes. Because of her health issues, the best risk class she could qualify for at the time was Standard Table 4. Table 4 is eight classes below the best possible risk class (Preferred Plus). Her monthly premium for this policy is $40.
Now ten years later, Eliza has a family including two children. She would like to have life insurance coverage for a longer period of time.
Her policy does include a term conversion option; however, Eliza is now at a healthy weight, has normal blood glucose levels, and her risk of diabetes complications is much lower. She has been sustaining a healthy weight and optimal blood pressure, cholesterol, and glucose levels for five years.
If she were to convert her policy into a permanent policy, her Standard Table 4 risk class would carry over. This would equal out to be very high premiums.
Instead, Eliza decides to apply for a new 20-year $250,000 term policy. Even though she is now ten years older, her health has significantly improved to allow her to qualify for Standard ratings. Her monthly premiums would then be approximately $30. In this case, it would make more sense for Eliza to apply for a new term policy versus converting to a permanent policy.
Here is a quick summarization of term conversions:
- Whatever risk class you were approved for when you purchased the term policy, you keep when you convert, even if your health has deteriorated.
- Your current age will be considered when determining your new permanent policy’s pricing, unless you opt for original age and pay a lump-sum.
- Some insurance carriers require a minimum amount of coverage to be left on the original term policy if you are doing a partial conversion.
- Each life insurance carrier has their own restrictions regarding when you can convert. For example, some carriers don’t let you convert within the first five years, some only let you convert within the first twenty years, and some will let you convert at any time.
- Life insurance carriers set a maximum age for when you can convert. For most carriers, this age is either 65 or 70.
If you have a term life insurance policy and your conversion expiration date is approaching and you want to be insured for a longer period of time, you have two options: convert to a permanent policy or buy a new policy.
If you are still as healthy as you were when you took out the policy (or maybe healthier now?), you may want to investigate the cost of a new policy versus converting into a permanent one. With a new term policy, you won’t have access to accumulating cash values like permanent policies offer, but you can be insured for another term at a significantly lower cost compared to permanent insurance. However, if your health has deteriorated even in the slightest, you are an ideal candidate for converting.
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