How and Why to Convert Term Life to Permanent Life Insurance

Partial Conversion

Under many conversion options, you’ll have the ability to convert less than the full amount of your term policy to permanent.

For example, if you have a $500,000 term policy, you may be able to convert $100,000 of it to permanent coverage.

The provision may even allow for multiple partial conversions within the conversion term.

For example, if you have a 30-year term policy that allows for conversion to permanent for the entire length of the term policy, you can convert 20% of the term policy to a permanent policy every five years. At the end of 25 years, you will have completely converted your term policy to permanent coverage (this strategy is known as “laddering” or a “laddered conversion”).

In that way, you’ll be able to stairstep your conversion from term to permanent, which may fit better within your household budget than doing a full conversion all at once.

Cost of Converting Term to Permanent Life

There is generally no cost involved in the actual conversion from term to permanent life insurance.

However, most insurance companies will charge a slightly higher premium on your term policy for the conversion option.

Exactly how much that will be will depend on the company, the dollar amount of the conversion, and the timeframe within which conversion is permitted.

For example, a 30-year term policy that gives you the option to convert to permanent coverage any time within 30 years of the original term will have a higher premium adjustment than one that permits conversion only within the first 10 years.

As well, though your health will be evaluated based on your condition at the time you took the original term policy – rather than at the time of conversion – there will be an adjustment for age.

That means the conversion to a permanent policy will carry a higher premium at age 40 than it would have if you have made a change at age 30.

But the biggest single cost factor involved in converting term life insurance to permanent is the basic fact that permanent life insurance costs much more than term life insurance.

For example, it generally costs about 10 times more in premiums for whole life insurance than it does for a term policy with an equivalent death benefit.

Naturally, the payment shock of the conversion to permanent coverage – in addition to the age adjustment at the time of conversion – can be cost-prohibitive.

This is a major reason why you may want to do a partial conversion, if that option is available.

If you only convert 20% of your term policy to permanent life, that will lower the premium to about 20% of what it would be if you did a full conversion.

The partial conversion can also be beneficial on another front.

Let’s say that at age 30 you take a $500,000 term policy owing to the fact that you had young children and a big mortgage obligation. But when you make the conversion at age 50, your children are grown and your mortgage is paid in full. Your life insurance needs may be fully met with a permanent policy for $100,000 or $200,000, instead of the original $500,000.

Reasons to Convert a Term Life Policy to Permanent Life

Though it doesn’t make sense in all cases, there are several reasons why a conversion may be worth doing:

Get the benefit of permanent life insurance

Just as the name implies, a permanent life insurance policy will be in force for the rest of your life.

This is unlike term, which will expire at the end of the stated term of the policy.

Fixed life insurance premiums

Just as a permanent life insurance policy has a permanent death benefit, the premiums for the policy are also permanent.

That means the premium you pay at age 40 will be the same when you are 50, 60, 70 and 80. This is completely unlike term insurance premiums, which will increase at the end of the term. Your term policy may enable you to renew to another term plan, but it will be based on your age at the time of renewal and typically carry a shorter renewal term.

For example, when a 30-year term policy ends, you may be permitted to renew it based on a five-year term. That means your premium will adjust higher every five years, due to your higher age at the time of renewal. This problem will be eliminated with a conversion to permanent life insurance.

Conversion is unaffected by a change in your health status

If you currently have term life insurance, and your policy expires, you may not be eligible for an extension or a new policy based on a deteriorating health condition.

However, since conversion to permanent coverage is based on your health at the time you apply for the original term policy, you’ll be able to qualify for permanent life insurance without regard to the condition of your health at the time of conversion.

Cash value accumulation

Permanent life insurance policies typically include a cash value accumulation provision.

That means:

While the premiums for permanent insurance are higher than they are for term, at least some of the premium is going into the cash value. That means you will be building a financial asset at the same time you are maintaining a life insurance policy.

You may be better able to afford permanent life insurance at a later date

Term life insurance makes the most sense for those with high financial obligations – typically younger people – and limited budgets.

But that permanent life insurance policy you weren’t able to afford in your 20s may be easily accommodated by your budget in 10 or 15 years.

Key Takeaways

A term-to-permanent life insurance conversion option is highly desirable, even if you don’t think you’ll ever take advantage of it.

Life insurance is all about preparing for the unexpected, and an event that may cause you to choose to convert your term policy to permanent is likely to be unexpected as well.

The conversion option gives you the right – but not the obligation – to convert your temporary policy to a permanent one.

Be sure to ask about the conversion option whenever purchasing a term life insurance policy. If it isn’t an automatic provision of the policy, you should request that it be added.

Even if it increases the cost of your premiums slightly, it’s an option worth paying a little bit extra for.