The two main types of life insurance are term and whole life. Term is more popular because it’s less expensive, but term life insurance comes with a set term period. If you live beyond that date and do not renew or covert the policy, then there’s no payout to your beneficiaries.
Whole life insurance lasts until your death with a guaranteed payout. Sometimes you can convert a term policy into a whole life insurance policy to ensure a guaranteed payout to your beneficiaries.
Converting Term to Whole Life
While many term life insurance policies include a term conversion rider that allows you to change the policy to whole life insurance, not all of them do. One type of term policy that usually does not allow for conversion is a decreasing term insurance policy. With this type of insurance, the payout amount decreases over time. It’s more affordable but does not normally include a conversion option.
If converting term to whole life appeals to you, the following options are ones to consider.
Purchase a Convertible Term Policy
A convertible term policy is able to convert from term to whole life. The conversion is a built-in feature and one that your insurance agent expects, so it’s an easy process.
Term life is less expensive than whole life, so it can be an entry point for people who currently cannot afford whole life but would like it in the future. Many term policies require a health exam or medical questions when you first purchase the policy. However, when a term policy is converted to a whole life policy, there are usually no additional medical questions or exams. This means that converting the term policy to the whole life policy is generally an easy and smooth process.
Note that when converting from term to whole life insurance, there is frequently a time period attached to the conversion clause, which requires you to convert in a pre-specified number of years or before reaching a certain age. Another consideration is that the premium will go up when you convert to whole life.
Add a Conversion Rider or Endorsement to Your Current Policy
Most term life insurance policies automatically include a conversion rider. If your current insurance does not have one, you might be able to add it. A rider is an additional clause to the original policy.
With a conversion rider, you’re adding the option to change your policy from term life to whole life. Adding the rider does not mean you need to change your insurance immediately, but it does open the door to exercising that option in the future.
Look For a Conversion Provision in Your Current Policy
Before adding a conversion rider, review your current term life insurance to see if that rider is already there, or if there’s a conversion provision.
A conversion provision allows you to switch from one insurance policy to another within the same company. This lets you change from your current term life insurance into a permanent policy. Paperwork will be involved in the change, but a physical examination will most likely not be required.
If you’re unsure where to look for this information, your insurance agent can help.
How Much Does It Cost to Convert Life Insurance?
Converting your life insurance from term to whole does not cost anything as long as there is a conversion provision or rider in your policy. However, the added expense comes in the form of premiums that are several times higher than they were with your term insurance. The price difference depends on your policy, age, the amount of payout you’ve selected, and other factors.
If you want to offset those costs, you might be able to do a partial conversion. This allows you to only convert part of your life insurance to whole life while leaving part of it in the term policy. It’s a compromise between lower premium costs and getting whole life benefits.
Whole life insurance costs more than term life insurance because it has more benefits. One of the most significant benefits of whole life is that it is permanent so long as you continue to pay your premiums. Another advantage is a guaranteed payout with a whole life policy, and that whole life policies build cash value over time.
Other factors that influence price are how long you have the policy before converting and if you paid more from the beginning for a conversion rider or if you’re adding a new one.
Why Consider Converting Term Life to Whole Life?
While converting from term life to whole life will cost more, there are many reasons why making the switch is appealing.
Avoid Another Health Examination
Many term life insurance policies do not require medical underwriting, so you can skip the physical and lengthy health questionnaires. The policy usually slides over without medical requirements when you convert from term to whole life. This can be beneficial to those who have had an adverse change in their health status. It’s also helpful as you age. The older you are, the more difficult and costly it can be to acquire life insurance.
Whole Life Costs Less as a Long-Term Solution
Even if you purchased term life insurance at a low rate when you were young, you might find out that, in the long run, it’s more expensive than converting to a whole life policy. This is because term life policies often renew at a higher rate, and that increase can be significant.
Your age and health status also affect the rate increases for term life. This means that at some point, you may find it more cost-effective to convert to a whole life policy and lock in your rate.
Take Advantage of Living Benefits
There are different types of whole life insurance policies which gives you options when you convert. Some of these permanent policies offer living benefits, which means you can access the money while alive for a handful of purposes. Typical forms of living benefit riders include:
- Terminal illness
- Chronic illness
- Critical illness
- Long-term care
It’s also possible to convert to a whole life insurance policy that allows you to take a loan from your cash value that accrues over time, which is another living benefit. In these situations, you do not need to explain what you’re taking the money out for, and it is not earmarked for specific events. You may never have to repay the loan, but interest will be charged.
Provide Lifelong Coverage and Secure a Guaranteed Death Benefit
One of the most well-known advantages of whole life over term is that it provides a guaranteed death benefit to your beneficiaries. A death benefit is the money or the payout paid to your policy beneficiary.
Term life insurance is pre-determined period at a set price. After that time period, the policy could renew at a much higher cost or lapse completely leaving no pay out to your beneficiary if you pass away. With whole life, a guaranteed death benefit is paid out unless you have borrowed against that money during your life as one of your living benefits. If you do borrow against it, the beneficiary will get the death benefit minus any outstanding loans.
Guaranteed death benefits are useful for surviving family members as the proceeds can pay for funeral expenses, outstanding debts, a child or grandchild’s education, replacement income for dependents, and other costs.
Alternatives to Converting Life Insurance
Converting a term life insurance policy to whole life is convenient, but it’s not the only way to get permanent life insurance. If your term life insurance expires or does not allow for a conversion, you might consider the following alternative insurance options.
Purchase a Completely New Whole Life Policy
You can have more than one life insurance policy. Rather than converting your life insurance, you can add a whole life insurance policy and get the benefits of permanent insurance. There are some downsides in that you will pay for two policies and might have some medical underwriting requirements, but you’ll have that guaranteed death benefit.
One benefit of going this route is you’re not tied to the whole life policies specified in your term conversion rider. As long as you qualify, you can consider every option out there.
Purchase Another Term Life Policy
Another way to extend your life insurance is to let your current term policy expire and purchase a new term policy with options you prefer over your old one. One of those options could be a conversion provision that allows you to transfer into a whole life policy at a later date.
Just remember, new insurance policies can have different requirements, so there might be a medical exam or other steps you need to take. Also, insurance increases in price as you age, so you may see a jump in premium prices.
Ladder Your Coverage
Some people want to extend their coverage but do not necessarily want to have whole-life insurance. It’s common to ladder the coverage, which involves overlapping term life policies and letting the oldest one lapse.
There are positives and negatives to this solution. The cost is usually the most significant benefit because term life is less expensive than whole life. One big negative is that it is still a term policy, so there is no guaranteed death benefit. Also, the cost will likely increase with each successive policy due to age. You might find that the insurance company will start requiring medical underwriting at some point, which can also raise the premium price.
There’s also the hassle of juggling policies and ensuring you have a new one in place by the time the last one expires. For some people, this is an easy chore. Other people would rather sign up for insurance and then forget about it.