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If you’re shopping for term life insurance, you might want the option to switch to a permanent policy in the future. Some people prefer to lock in lifelong coverage or find it helpful to use life insurance to build cash value.
Some term life policies offer a chance to convert your policy before the coverage period ends. Here’s how term conversion works and why you might want to consider this type of life insurance.
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What is convertible term life insurance?
Convertible term life insurance is a type of coverage that allows you to convert a term policy into a permanent policy. When you buy term life insurance, coverage lasts for a set period of time only — like 10, 20 or 30 years. With most insurers, you can convert your policy to whole life insurance or universal life insurance.
The majority of term life policies are convertible. Some policies have a built-in conversion provision, while others have a policy add-on called a term conversion rider.
Which policies can term life be converted to?
Many insurers allow conversion from a term life policy to any type of permanent life insurance. Others restrict conversion to certain types of policies such as universal life insurance. Here are a few reasons you might want to convert to particular types of permanent policies.
Converting term to whole life insurance
You might want to consider converting a term life insurance policy into whole life insurance if you're an adult with a health condition. This could help you lock in lifelong coverage without the need for a medical exam.
Converting term to universal or variable life insurance
You might convert term life into a universal or indexed universal life policy to build cash value at a faster pace. Maybe you’d like to provide an inheritance or you’re diversifying retirement savings after maxing out other options.
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How do convertible life insurance policies work?
There are a few things you should know about the process for converting a term life insurance policy.
⏰ There’s usually a conversion window outlined in the policy.
You might have a limited window of time to exercise the conversion option. Some policies require you to convert within the first 10 years, while others allow you to exchange your policy before a certain age, like 65 or 70. While the specific rules vary by policy, you’ll typically need to convert your coverage before the term expires.
🩺 You won’t need to take another medical exam.
You can usually convert your coverage without going through the underwriting process again or taking a new life insurance medical exam. This means you won't be penalized if you’ve developed new medical problems since you bought the policy.
💰Your new premium is likely to be more expensive.
Permanent life insurance usually costs more than term life insurance. This is because it offers lifelong coverage and builds cash value. If you’re converting from term life, the insurer will set your rate based on your health at the time you bought the original policy and your age at the time you convert the policy. In other words, your age will affect how much you’ll pay, but the insurer won’t consider your health. The insurer may also charge a conversion fee.
📑 Not all term life policies are convertible.
To find out if your term policy is convertible, read the policy documents or contact your life insurance company. If you’re shopping for life insurance, be sure to ask about this feature before you sign the contract. Life insurance needs can change over time, and convertible policies give you flexibility to adjust.
➗You can choose partial conversion of term life coverage.
Some insurers may allow you to convert part of your policy, meaning you could keep some of your coverage as term life insurance and upgrade the rest to permanent life insurance. This approach could be a good fit if you want a policy that builds cash value before retirement, but still need affordable life insurance for a few more years to cover large debts like a mortgage.
Did you know...
How does partial term life conversion work? Say you have $500,000 in convertible term life insurance. You might be able to convert $250,000 of that coverage to a permanent life policy. This would leave you with $250,000 in term life insurance that you could either keep as is or choose to convert later. Why would I want to convert a life insurance policy?
Some reasons you may want to convert a term policy to a permanent life insurance policy include:
- You’re still providing for dependents or paying off debt and want continued financial protection for your loved ones.
- Your health has declined and you want to provide a death benefit to your survivors.
- You bought a term policy while you were younger and premiums for a permanent policy were too expensive, but you can afford them now that you’re older.
Pros and cons of converting term life insurance
Pros
Lifelong coverage.
Ability to build cash value.
No medical exam needed.
Cons
More expensive premiums.
A fee may be involved.
When can you convert term life insurance?
Each insurer may have different rules about when you can convert, but it will always need to be before your term life policy ends. Some insurers specify a period of time at the beginning of the term policy while others offer conversion up to a certain age.
Here are some examples of how life insurance companies handle the conversion from term to permanent life insurance.
| Insurer | Convertible policies | Conversion rules |
|---|---|---|
| Term life → universal life. | Convertible up until age 70. Policies issued at age 66 are convertible for the first five policy years. | |
| Term life → whole or universal life. | Conversion is allowed during the first five years of a term life policy period. | |
| Term life → any permanent life policy. | EssentialTerm Value: Within the first 7 years or up to age 70. EssentialTerm Plus: Up to age 70. EssentialTerm: Up to first policy anniversary after 65th birthday. | |
| Level Term → any permanent life policy. | Convert within the first five years of the term or anytime during the term with an Extended Conversion Rider (ECR). |
What’s the difference between term and permanent life insurance?
If you’re considering converting your term life policy, it’s worth noting the basic differences between these two kinds of life insurance.
Term life
Cheaper: Term life is generally the cheapest type of life insurance.
Temporary: Policies last for a set time period, such as 10, 20 or 30 years.
No cash value: You can’t borrow against or cash out a term life insurance policy.
Permanent life
Pricier: Permanent life policies are usually more expensive than term life insurance.
Permanent: Policies can last the rest of your life.
Builds cash value: Policies grow cash value and once you've built enough, you might be able to cash out or borrow against the policy.
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