When a convertible term life policy is converted to a permanent policy the insured

Why should you consider converting term life to whole life insurance?

One of the benefits of a term life insurance policy is that you typically choose which term length fits your budget and life plans. These policies are usually set to expire 10 to 30 years after purchasing them, often when you predict your dependents will no longer need the benefit and you'll have paid off any debt. However, coverage is sometimes still needed even after the term life insurance policy expires. While the process and reasons for converting from term to whole life insurance vary, there are several common scenarios in which switching makes sense.

You're still providing for dependents

The most common reason you might obtain term life insurance is to continue providing for your dependents after you're gone. Parents often obtain a life insurance policy that lasts until their children have reached legal age or graduated from college. However, you might find yourself unexpectedly caring for a family member in need, whether they're young or elderly. Life is unpredictable, and situations occur where your loved ones can no longer live independently or develop a condition that requires them to depend on you. In these scenarios, converting term to permanent insurance can help provide for the originally unexpected needs of loved ones.

You have outstanding debt

Policyholders often choose term life insurance to pay off any outstanding debt in case they pass away unexpectedly. However, when your term policy expires, you may still have outstanding debt that life insurance could help pay off when you pass. By converting from term life to whole life, you can maintain your coverage for the entirety of your life and protect your family financially.

Your health situation has changed

If you decide to convert term to whole life insurance, your insurance company might forgo the underwriting process and therefore allow you to avoid the medical exam and lifestyle assessment routinely required for a new whole life insurance policy. If you had to go through a new underwriting process (as you would with a completely new policy), the insurer would take into account your current age and any health conditions you may have developed — which could ultimately disqualify you from coverage if you were deemed a risk to insure due to your health.

How to convert term to whole life insurance

When switching from term to whole life insurance, you need to determine if your term policy has a conversion provision written into the policy or a term conversion rider. To find out if your policy allows for conversions or has a rider, you should be able to look for it in your policy terms. Or you can contact your life insurance company so they can talk you through your options. If you're shopping for term life insurance, ask ahead of time if your policy will have a term conversion life insurance rider in case you ever want to switch it over to a permanent option.

Alternatives to switching from term to whole life insurance

A partial conversion

If your insurer allows it, a partial conversion enables you to convert only a portion of your term life policy to whole life — resulting in a death benefit smaller than the original one, with correspondingly lower premiums. The portion you don't convert would remain active as a term policy until the original term end date, which means you'd have two premiums to pay until the term policy expires.

You might consider a partial conversion for a couple of reasons:

• In the case that you pass away after the original term expires, you want to provide only a portion of the original term life policy's death benefit for your beneficiaries.

• You don't want to pay the significantly higher premiums that would result from converting your entire term life insurance policy to whole life.

A new term life policy

Purchasing another term life insurance policy could make sense if you only want life insurance coverage for a short amount of additional time rather than for the rest of your life. Without the higher premiums of whole life insurance, a new term life policy can be a popular option, though your current health and age would likely affect your premium.

A burial insurance policy

Another option available for those worried about leaving their family with funeral costs is to purchase final expense insurance. This type of life insurance is generally the most affordable and pays for end-of-life expenses.

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There's a saying for life insurance that goes: You pay for life insurance with your money, but you buy it with your health. A health exam is required for most life insurance policies, and you need to pass the exam to qualify for coverage. This might make it difficult to plan for the future. While you may be eligible for coverage now, it's impossible to know where your health will be many years down the road.

Fortunately, convertible term life insurance can help you keep your options open. Learn more about this life insurance type, including how it works and when it might make sense for your needs.

A convertible term policy starts out like a regular term life insurance policy. It's temporary life insurance coverage with a set expiration date, such as 10, 15, 20 or 30 years. If you die within the coverage period, the policy will pay out the death benefit to your beneficiaries. If you outlive the coverage period, your coverage ends.

However, convertible term policies have an extra feature that lets you switch some (or all) of your coverage to permanent life insurance — coverage that could last your entire life and build cash value, as long as premiums are paid. More importantly, you wouldn't need to pass a health exam to make the conversion. Increases in coverage could be subject to new underwriting.

One of the primary benefits of convertible term life insurance is that it can help keep your options open. While a term life policy may be the right fit for you today, years later you may want to switch to permanent life insurance coverage. But your future state of health may prevent this switch. With convertible term life insurance, you don't have to worry about tomorrow.

A convertible term policy also lets you extend your coverage as it gets close to expiring. You can convert at any point while your term life policy is still active — even a few days before the expiration date, depending on the policy. Some companies will also let you convert partial amounts, so you don't have to convert your entire term life policy.

Your premium will probably increase when you convert your policy because you're switching to permanent coverage. Permanent life insurance generally costs more than term life insurance because it never expires — so long as you keep paying the premiums. The insurance company bases the price of your new permanent coverage on how old you are when you convert.

The good news is the company will keep your health rating the same. If you qualified for a health discount before, you'd keep that discount on your new permanent policy after the conversion, even if you develop health issues.

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When Is Convertible Term Life a Good Fit?

Convertible term life insurance might make sense for someone who wants term life insurance now but might want permanent coverage in the future. Let's say you're a 20-something looking to buy your first life insurance policy. You may like the idea of permanent coverage, but you may only be able to afford term life insurance. With a convertible term policy, you can switch to permanent life insurance when you're ready — with no health exam.

This policy type may also be useful for someone who's worried about losing their coverage because of health problems. Let's say you're in your 40s and want a 10-year term life policy. Maybe you've qualified for a health discount. You're not sure if you'll still want coverage in 10 years, but you'd like to keep your options open. By choosing a convertible term policy, you could extend your coverage later — even if you develop health issues.

Finally, a convertible term policy may be useful for someone who wants to continue their coverage. Some people purchase term life insurance policies for coverage until retirement. But many also realize they would still like coverage once their terms expire. Convertible term policies allow people to switch to permanent coverage options when the time comes.

Any Special Considerations?

An insurance company may charge an extra fee for adding the convertibility feature, but this depends on the company. You may be paying more for a feature you may not use and will need to decide if the added flexibility is worth the cost.

Also, once you convert your coverage from term to permanent, you can't reverse the decision. If you realize the price of permanent is too much for your budget, you would need to buy a new policy to switch back to term, which may also mean passing a health exam.

Finally, if your health improves or you quit smoking after you buy a term policy, you may qualify for a lower rate by reapplying and going through the health exam again. A financial representative can help you decide on the best plan of action.

By making your term convertible, you could avoid gambling your life insurance coverage on a future health exam. It's entirely up to you whether you want to extend your coverage later.

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We have financial professionals ready to assist you on your life insurance journey.

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