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—and term insurance that is convertible to whole life. (Read “Convertible Term Life Insurance: The Third Option” for an excellent primer on convertible term life insurance.) Converting term life to whole life insurance can be a huge boon in your insurance strategy.
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 provision that allows the owner of the policy to convert all or a portion of the policy into a permanent life insurance policy.
This provision is only available during a specified period, often the length of the term insurance. The benefit is that you can make the conversion without having to prove you are in good health. As long as you have maintained the policy with timely payments, there is no requirement to undergo a new exam or any additional health screening at the time of conversion, regardless of your medical condition.
The benefits of convertible term insurance are significant:
- It preserves your life insurance approval and your approval rating. This guarantees your insurability as long as the conversion provision remains. Many people experience health challenges that can mean paying a higher premium in the future. Some may struggle to get additional 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, premiums are much less than cash-value insurance.
- It gives the policy owner control and flexibility. The convertible term allows policy owners to convert to permanent insurance as they are able, without the 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.
Yearly-Renewable Term Insurance
Another type of convertible term insurance is annually or yearly renewable term. This is term life insurance that you must renew each year. The premiums are very reasonable at first, then increase each year upon renewal. 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.
Why Convert Term to Whole Life?
You have the option of simply using convertible term insurance as if it is regular term insurance, letting it expire. So why convert term to whole life insurance? Reasons you may want whole life insurance include, yet are not limited to the following:
You Desire Increased Savings
Dividend-paying whole life insurance is a great savings vehicle, thanks to the cash value component. Every time you make a premium payment, you’re increasing your cash value a little. It’s savings that shows up like a bill, which can help you be more disciplined. This means more cash and liquidity, which is a good idea to have!
You’re Going to Outlive Your Term Insurance
If you wish to leave a legacy, a term policy is not the way to do it! While it certainly helps you fulfill your Human Life Value for a time, there’s a very slim chance your term insurance will pay out. Converting term to whole life insurance can help you turn the “pure cost” of insurance into an asset that provides living benefits and a legacy. By making the switch, you’ll protect your legacy, because whole life insurance is permanent insurance. This increases your ability to use the policy now, and later, and it also increases the size of your estate.
You Have Dependents
As we’ve mentioned, term insurance lacks the certainty of whole life insurance. There is no guarantee of a Death Benefit, the way permanent insurance can guarantee. If you have loved ones or dependents that you wish to leave money to, it’s wise to convert that term insurance to whole life before the conversion provision is up. The great thing about convertible term is that you have some time (flexibility) to do so as your cash flow allows.
You Can Afford It
If you have convertible term insurance while you’re young, you’ll benefit from converting term to whole life sooner than later. While term insurance locks in your insurability, your age may still affect your premium. The younger you are, the better rate you’ll get on your insurance. If you can afford whole life now, it’s worth converting so that you lock in that premium. Once locked-in, those premiums won’t go up.
You Have Health Concerns
If your health changes and you’re afraid you may no longer be eligible for whole life insurance, it’s worth converting as much as you can within the conversion provision. This way, at least you’ll lock in some whole life, and have that bit of protection guaranteed.
A Cool “Cash Bonus”
There’s also a cool “cash bonus” in a convertible term policy. Typically, one year’s convertible term premiums apply to your whole life policy at the time of conversion. This effectively reduces your first-year premium on the new policy. This is called a conversion credit.
Converting Term Life to Whole Life Insurance – 5-Step Guide
So… let’s say you’ve got convertible term insurance and you’re interested in converting it. How do you go about converting term life to whole life? Making the switch takes some effort, yet it’s not as complicated as you’d think.
1. Know What You’ve Got (and What You Want)
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 insurance.
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 in our discussion on universal life insurance, we strongly recommend whole life over UL or IUL (indexed universal life) insurance. You also might find our checklists on life insurance questions to BEFORE applying helpful.
2. Know Your Contract
Read the fine print on all of your provisions, timeframes, and limitations before you convert term life to whole life. 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 heartbreaking story. He fought two battles with cancer as a relatively young man. The good news: he survived cancer, and he had some convertible term he converted 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 could no longer get 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 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 the face value or convertible amount) and the amount of PUA (paid-up additions) until you feel comfortable with it.
4. Sign the Paperwork (and Skip the Exam!)
Now it’s time to sign the paperwork and get started. You’ll affirm the terms of the policy and what payment structure you would like (usually annually or monthly). Your beneficiaries will remain the same unless you change them. You may have life insurance questions after the application that your agent can help answer.
5. Make Your First Payment
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 policy, once again, watch your timelines so that you can take advantage of your provision before it expires.
Should I Convert Term to Whole Life?
You may be asking yourself, should I convert term to whole life? The answer is up to you. You have some flexibility with convertible term insurance, yet you want to be sure you make a choice before the time runs out. Converting term life to whole life insurance 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. These factors may change your desire or ability to convert term life to whole life. 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 Prosperity Thinkers or email us at Welcome@ProsperityThinkers.com! We specialize in whole life insurance and convertible term insurance. We don’t bite and there’s NO hard sell. Prosperity Thinkers takes an educational approach: we get your questions answered and help those who would like our help. (Isn’t that the way it should be?)