Converting your term life insurance policy

Term Life Insurance Conversion: The Basics

We get a lot of clients who are nervous about life insurance. Whole life insurance seems so permanent and confusing. And term life insurance seems like it won’t last long enough. However, the process of converting your life insurance can be daunting. 

The good news is that you are not locked into any policy forever. If your term life insurance policy is not long enough to suit your needs, you can always convert it to a whole life insurance policy. 

In this article, we will cover the basics of converting your term life insurance to permanent life insurance coverage. 

Why Convert Your Coverage?

Term life insurance is an excellent choice for those who need inexpensive coverage should the worst happen. However, age and health declines are natural, and you may find yourself wanting coverage that sticks with you, no matter the circumstances. This is where term life insurance conversion comes in. 

Converting your term policy allows you to take advantage of an expiring policy, turning it into a life-long permanent policy. One that does not expire. This can boost your protection for many more years – whether or not you have a medical condition or are considered high-risk. 

A few reasons to consider converting:

  • To build savings. One benefit to conversion is that part of your premiums for whole life insurance policies go toward building a cash value! You can borrow against this value or withdraw money at any time.
  • To protect your dependents. This is especially true if you have a life-long dependent, such as a child with special needs. Whole/permanent life insurance can be used to build a trust that will care for your dependents after you pass. 
  • To plan your estate. Death and taxes are, unfortunately, two certainties in life. Your estate taxes do not disappear once you die. The money from a permanent life insurance policy can be used to pay any taxes your heirs may owe on your estate. Please note: that this option is not for everyone. If your estate is worth millions and you are concerned about its taxes, give us a call!
  • To guarantee coverage. Especially if your term life insurance policy is about to expire! Conversion will guarantee you coverage, so long as you’re paying your premiums.
  • For health problems. We will get into this a bit more later, but it is important to know that insurers will not consider your current health during a conversion. If you have become at higher risk or developed a health condition that would make it difficult to obtain a new whole life policy, conversion is right for you. Please note: if you’re still healthy, you should shop around for quotes before considering conversion!

What is Term Life Insurance Conversion?

Term life insurance policies are policies designed to last a specified amount of time. This could range anywhere between 10 and 30 years. The idea is you are placed in a risk class and pay your class’s premiums for the duration of the policy. Should the worst happen during the timeframe your policy is active, your family will receive the benefit of your policy. 

Term life insurance is appealing because they are often inexpensive, and easy to get, and the death benefits tend to be larger. Additionally, there are many customization options for term life insurance coverage.

The downside is that, when term coverage expires, you will not get a return on your premiums and your coverage expires with the term. This can leave your family unprotected.

Term life policy conversion allows you to keep your life insurance for the rest of your life. Your conversion option can occur during any time of your coverage term, or before a certain age. 

The option to convert is typically included in your policy for free; however, be sure to review the fine print of your policy for deadline specifics! You will be given the option to convert all or a portion of your policy. 

Here are a few things to keep in mind when converting:

  • Your policy premiums will be more expensive with a whole life policy. 
  • You keep the risk class you were approved for when you purchased the term policy, no matter your current health. 
  • Each company has different conversion restrictions. Some may let you convert at any time, and some may not let you convert within the first five years of your policy. 
  • Should you choose to partially convert: some life insurance companies require that you leave a minimum amount of coverage on your original term policy. 
  • There will be a maximum age for when you are able to convert your policy. Typically, this is between 65 and 70 years of age. 

The Conversion Process 

The conversion process is not incredibly difficult – if you know what you’re doing. In the simplest terms, the conversion only involves four steps:

  1. Review your current policy. You should always take the time to sit down and go over your existing policy. Do you have a conversion rider available? What are the terms and requirements for conversion?
  2. Research your options. What products does your carrier offer for conversion? Which is best for your situation? Can you afford the premiums of a permanent policy? 
  3. Sign an “Agent of Record” (AOR) form. This names your carrier as the new agent of the policy, essentially stating you will be sticking with this carrier for your permanent policy. 
  4. Sign all conversion forms and new insurance illustrations. A life insurance policy illustration shows your current and maximum premiums for each year; total premiums paid up to that year; and each year’s death benefits.

Pro Tip For Term Life Conversion

One of the biggest mistakes you can make when preparing to convert your life insurance policy is to go directly to the insurance carrier. You should always speak to a trusted life insurance agent before converting your term life insurance policy. 

You may not have a conversion rider added to your life insurance policy. While they are mostly standard at this point, you want to make sure your life insurance agent is carefully reviewing your policy and walking you through your options. 

The earlier you can review your policy the better. This way you can plan ahead and continue your life insurance protection no matter what life throws at you.

If your plan does not have a conversion option, give us a call and we can help you add a life insurance conversion rider to your policy!

Your Conversion Secret Weapon: An Independent Agent

We know: that we are always suggesting you use an independent agent for your life insurance needs. 

When converting, it’s especially important to seek expert help, for a few reasons. 

  1. You can convert to multiple different products. Your carrier may have several different permanent coverage options. Chances are, the differences in these products are small but are important. An agent can help you understand the differences and choose which product is right for you.
  2. Your conversion *options* vary. Do you know if converting your full policy is your best bet? How much should you convert if you’re only converting part of your policy? An agent will explain these options and guide you to the one that’s best for your situation. 
  3. The paperwork for conversion is not straightforward. While we try to help arm you with knowledge as much as we can, the fact is that only an industry expert can explain some of the languages in conversion paperwork. Additionally, there is no straightforward template for conversion, so even if you know the basics, you may be hit with a few premium clarifications or questions you are uncertain of.
  4. Conversion may not be right for you. An independent agent will take the time to listen to your goals and budgetary needs and recommend the right product accordingly. Every conversion option and conversion product will not be universal. Every situation is unique, and you should not purchase a product that doesn’t fit your needs.