Converting Term Insurance to Whole Life

There are two types of life insurance that we heartily recommend. One is dividend-paying whole life insurance—usually set up to maximize cash value, if that is the policy holder’s desire—and term insurance that is convertible to whole life. (Read “Convertible Term Insurance: The Third Option” for an excellent primer on convertible term life insurance.)

If you have convertible term life, how and when should you convert it to whole life? Today, we address what happens “next” in the process of converting convertible insurance. We also address the reasons WHY it is beneficial. But first, let’s start with a quick recap on what we mean by convertible term insurance.

What is convertible term life insurance?

Convertible term insurance looks like regular term life insurance on the surface. It covers a predetermined term, such as 10 or 20 years, for a flat premium payment. If the insured passes away within that term, a death benefit is paid. The policy builds no cash value. However, a convertible term policy has a conversion provision that allows the owner of the policy to convert all or a portion of the term insurance policy to a permanent life insurance policy during a specified period of time—without having to prove they are in good health. As long as the policy has been maintained with timely payments, there is no requirement for the insured to undergo a new exam or any additional health screening at the time the policy is converted, regardless of his/her medical condition.

Another type of convertible term insurance is annually or yearly renewable term. This is term life insurance that must be renewed each year. The premiums are very reasonable at first, then increase each year when it is renewed. This type is a good choice if you plan on converting the policy in the first few years. If not converted, it eventually becomes cost-prohibitive.

The benefits of convertible term insurance are significant:

  • It preserves your life insurance approval and your approval rating, guaranteeing your insurability while the conversion provision remains. Many people experience health challenges that can mean paying a higher premium in the future or having a hard time obtaining life insurance at all.
  • It’s affordable. Convertible term insurance costs a little more than the cheapest term insurance, but not much more. As it has no savings component, it is much less than cash value insurance.
  • It gives the policy owner control and flexibility. Convertible term allows policy owners to convert to permanent insurance as they are able, without risk of losing insurability.
  • Convertible term riders (not a standalone policy, but a rider on a whole life policy) can even allow you to put more cash into your policy without the policy becoming a modified endowment contract, or MEC.

Why convert term insurance to whole life?

You have the option of simply using convertible term like regular term insurance, letting it expire. However, we recommend making the conversion as you are able. Some reasons why:

You desire to increase your savings. You might benefit from a reason to be disciplined, and a premium bill can help! Or you might have plenty of investments, but be lacking in cash and liquidity.

You’re going to out-live your term policy. If you wish to leave a legacy, a term policy is not the way to do it! We like term insurance as a way to provide affordable protection and insure your human life value, but chances are slim that it will ever provide a benefit.

You can leave a legacy (or a larger one) with your policy for heirs and/or charities. Whole life gives you the ability to expand the worth of your estate.

You may have dependents or grandchildren who may benefit from financial help after you die. If there are children in your family with special or medical needs, having permanent life insurance may be an important way to continue to help them after you’re gone.

You can afford it now. Often people purchasing convertible term are young or have young children. A whole life policy may be easier to fund now.

You may have health issues. You might be in danger (now or in the future) of losing your insurability if you do not convert your policy during the period of your provision.

The sooner you convert your policy, the lower your payments will be. That’s because pricing for policies is age-sensitive. With whole life, you’ll lock in premium payments that will never go up.

There’s also a cool “cash bonus” in a convertible term policy. Typically, one year’s convertible term premiums are applied to your whole life policy at the time of conversion, reducing your first year premium on the new policy. This is called a conversion credit.

How to convert term to whole life insurance

So… let’s say you’ve got convertible term insurance and you’re interested in converting it. How do you go about making the switch?

#1: First, make sure it’s the kind of insurance you want to (and can) convert!

Find your policy, read it, and get clear on what you’ve got. Some convertible term insurance can be converted to whole life, while some can only be converted to universal life (UL). Some term insurance can’t be converted at all, or the provision period may have expired. That’s all determined by your policy and the company that issued the term life

While there may be instances where you’d convert to universal life—for instance, if your insurability is now compromised—we wouldn’t usually recommend it. As we’ve covered elsewhere such as this article and this one, we strongly recommend whole life over UL or IUL (indexed universal life) insurance. You also might find this checklist helpful: “Essential Questions to Ask BEFORE You Apply for Life Insurance.”

#2: Be aware of your time frames, limitations, or other rules.

Read the fine print on do’s, don’ts and limitations. Each life insurance company has its own rules. For instance, you might have to convert within five years. Or your ability to convert may expire, bit by bit, over a period of years. If you convert part of your policy, you may have to keep a certain amount of term insurance (such as $200k) if you wish to keep the term portion of the policy.

We have a friend who recently told us a heart-breaking story. He fought two battles with cancer as a relatively young man. The good news: he survived the cancer, and he had some convertible term he was able to convert into whole life insurance. The bad news: while he was busy responding to his health challenges, much of the policy’s convertibility expired. When he finally reviewed his policy, he realized he can no longer obtain the life insurance he desires to protect his family. (He now has some eligibility again after a few years cancer-free, however, he must pay a higher rate.)

#3: Contact your advisor or agent for an illustration.

This is the person who sold you the policy. (You can also contact the company directly if they are no longer in business, or reach out to us for help.)

Your advisor will fill out a conversion request and have you sign it. They will also run an illustration for you based on the new policy you want. At this point, you can adjust the amount (up to to face value or convertible amount) and the amount of the PUA (paid up additions) rider until you feel comfortable with it.

#4: Sign the paperwork (but skip the exam!)

You’ll affirm terms of the policy and what payment structure you would like (usually annually or monthly). Some of these questions will be relevant: “Questions to Consider AFTER You Apply for Life Insurance.” Your beneficiaries will remain the same unless you change them.

#5: Make your first payment and start the new policy.

Congratulations—now you’ve got permanent whole life insurance in place! Whole life is the most efficient long-term savings vehicle available. Plus it guarantees a death benefit (provided you keep your policy in force) and can provide living benefits as well.

If you did not convert your entire convertible term policy, once again, watch your timelines so that you can take advantage of your provision.

Converting your term insurance.

Converting your term insurance to whole life is a “limited time opportunity.” However, there are a lot of factors to consider, such as your current budget, financial obligations, and other policies or financial vehicles. It can be an excellent idea to get professional advice when making financial decisions.

If you do not already have a trusted advisor and would like a no-hassle quote in the form of an illustration, contact Partners for today! We specialize in whole life insurance, convertible term, and alternative investments outside of the stock market. We don’t bite and there’s NO hard-sell. We take an educational approach, get your questions answered, and help those who would like our help. (Isn’t that the way it should be?)

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