Whether you’re new to the topic or looking for more information on converting your term policy to a permanent policy, this guide provides the necessary tools and resources to understand life insurance conversion. Converting a term life insurance policy is a strategic decision that can significantly impact your financial security and that of your loved ones. This article explores the key factors involved in life insurance conversion and offers practical insights to help you make confident, informed choices about your coverage and long-term financial planning.
What is Life Insurance Conversion?
Life insurance conversion is a provision attached to many term policies that allows a term life insurance policy to be converted into a whole life or universal life policy. Converting an existing term policy does not require the insured to undergo another medical examination, making it easy for individuals who want to continue their life insurance coverage even though their term policy is at the end of its level term. While premiums will increase with a permanent policy, the policyowner will have continued protection on the insured beyond the original term period.
If your term policy is eligible to convert to a permanent insurance policy, then you must contact your insurance provider to determine what your options are for permanent insurance. As part of the process, you’ll also decide how much of your term life policy you’d like to convert. Once that’s determined, the final step is to complete and submit a conversion application to your insurance provider for review. It’s crucial to discuss your policy’s conversion deadline with your insurer, as some providers allow conversion only within a certain timeframe before the policy expires, while others impose an age limit. Missing these cutoffs could mean losing the option to convert altogether.
What Are the Benefits of Conversion?
There are multiple benefits to converting term life to whole life or universal life insurance. Not only do you get to maintain coverage for the rest of the insured’s life, but with most convertible policies, the insured does not need a new medical exam. Foregoing a medical exam saves time, and it can even help you gain more favorable conditions for your converted policy. Since you don’t have to renew your health score —even if your health conditions have changed —and insurers consider the original underwriting as sufficient for your converted policy, your new policy will be in the same risk class as your original policy. Even though paying for a permanent policy will likely incur higher premiums, the premiums will likely be lower than if you took out a new permanent policy today with an updated medical exam.
Conversions also allow the policyowner to accumulate cash value. Premium payments are higher than term policies because a portion of the payment goes into a separate cash savings account attached to the permanent policy. The cash value accumulated grows at a guaranteed rate.
A final benefit of converting a term policy into a permanent one: you can decide how much of the term policy you would like to convert. Whether it is the whole policy or only a portion, you can choose how to convert your term policy and what type of permanent life insurance you want to convert it to.
Knowing Your Term Life Insurance Policy
Knowing the different aspects of your term policy is important when deciding to proceed with conversion life insurance. Read on to learn more about the specifics of term life insurance and if you are eligible to convert your policy.
Understanding Term Life Duration
When you purchase a life insurance policy, the term length is usually between 10 and 30 years. That is the policy’s active period, which means that throughout the term, if the insured were to pass, the beneficiaries would receive the entirety of the death benefit. However, if the insured were to pass after the term period ends, the beneficiaries would not receive anything.
Death Benefits Explained
The death benefit on a life insurance policy provides a cash payout to your beneficiaries if you were to pass during the policy’s active period. It’s typically used by your beneficiaries for funeral expenses, income replacement, and debt repayment. Oftentimes, insureds who take out a term policy do so to provide financial support to their loved ones who suddenly — and unexpectedly — need to cope with one less source of income. Once the insured passes away, the beneficiaries receive the whole net death benefit, tax-free.
The End of the Term Life Policy
Since term life insurance policies end at a specified time, the insured is no longer covered by the policy once they reach the end of the term length. This means that people who want to continue coverage might have to get a new policy, which would include another medical exam and the possibility of being turned away for older individuals. However, there are a couple of options: you can either extend or convert life insurance so that the policy stays in effect as you pass the end of the term length. Extending your term life policy will typically not involve a new medical exam, but you will have to pay a higher premium that reflects your current age at the time of extension. Converting your term policy to a permanent policy will also increase premiums, but you can begin accumulating cash value with your new whole or universal life policy.
The Life Insurance Conversion Process
If you ever wanted to know about converting term life to whole life insurance or universal life insurance, follow these steps to convert your term life policy with ease.
- Determine eligibility. Find out if you are eligible to convert your term policy by checking the conversion provision in the documents you received when first purchasing the policy
- Contact your insurance carrier. Reach out to discuss conversion options for permanent insurance and ask how much of your term policy you would like to convert. Make sure to bring up the conversion deadline because insurance carriers differ on whether they require a conversion before a specific age of the insured or within a certain time frame before the end of the term policy.
- Submit application. Once you confirm the type of permanent insurance you want, you can complete the application and submit it to your insurance carrier for review.
By following these steps, you can smoothly transition from temporary to permanent coverage without undergoing a new medical exam. Life insurance conversion gives you the opportunity to maintain lifelong protection and preserve the value of your policy, making it a smart move for your long-term financial security.
Conversion Period Details to be Aware of
As you explore the option to convert your term policy, be aware of your conversion period. A term life insurance policy’s conversion period is a window of time in which you can complete a life insurance conversion. While it differs across insurance providers, the conversion period is generally before you reach a certain age (that is specified in your life insurance agreement) or within a certain amount of time before the term length ends (which can be anywhere from a couple of months to a couple of years). If you’re interested in converting your term policy, talk to your insurance carrier or a financial professional who can ensure that the paperwork and conversion requirements are completed before the deadline ends.
When is the Best Time to Convert Life Insurance?
There are several reasons why a policyholder may want to convert their life insurance policy. The best time to convert your term life insurance policy to a permanent option is within the conversion period in order to avoid having to undergo another medical exam and get the most favorable premium structure possible. Checking your policy for the conversion deadline is important to confirm that you are within the specified time frame to proceed with a conversion.
Policyowners might consider a conversion for many reasons:
- Continue coverage. Some individuals want to continue coverage after their term policy expires, so they convert to a permanent policy. This ensures they have the continued coverage they want as long as they keep paying premiums. This can provide peace of mind that beneficiaries are cared for even in the insured’s passing.
- Build wealth. Converting to a permanent policy will create a cash-value asset that is not achievable with a term policy. By converting to whole or universal life insurance, policyowners can accumulate cash value on their policy with each premium paid.
- Protect loved ones. It provides a safety net for loved ones as they can use the death benefit to pay for any debt or financial expenses incurred during the insured’s life. The money can also be used to pay for funeral expenses and to help families who have lost a source of income.
- Sell their policy for cash. Many life settlement providers prefer to purchase permanent life insurance policies over term policies. So, if you no longer need your policy and are looking to sell it in a life settlement, converting your term policy may be a good option.
If you’re searching for the best way to extract value from your policy today, Coventry experts are happy to help you learn how to sell your life insurance policy. Get in touch to find out more about whether your policy qualifies for a life settlement and if you need a converted policy to sell it for a one-time cash payout.
Evaluating Conversion Riders and Costs
Conversion Rider Explanation
Conversion riders allow you to convert your term life insurance to whole life or universal life insurance without needing to complete a new medical exam or health update. Sometimes, term policies already include a conversion provision, but other times, you might need to add a conversion rider if you plan on converting your policy in the future. They can also affect term life insurance policies by making them convertible when they are otherwise not. Not all term policies come with a conversion provision, so if you want to convert your term policy to a permanent one and it is not written in your policy, you can get a conversion rider that allows you to make the switch to whole or universal life when you are ready.
Costs and Premiums After Conversion
The costs of premiums before and after conversion for a term policy largely depend on your age and rate class. When you first get a term life policy, the younger and healthier you are, the cheaper your premiums will be because you have a high chance of surpassing the term length of your policy. If you reach the end of your term length and wish to retain your coverage, conversion is an excellent option to switch your policy to a permanent one and not undergo a new medical exam. Your premium payments after conversion will increase because you will be older at the end of the term, but they still look at your health from your initial medical exam, which makes your premium structure more favorable if you have a change in health throughout the term length. So, despite an increase in premiums, you’ll likely have lower premiums than if you took out a new policy with a new carrier at your current age because the only new factor your current insurance carrier will look at is your increased age, not your health.
Final Thoughts
Understanding life insurance conversion is essential for any policyholder attempting to plan out their financial future. Whether you’re seeking a term-to-permanent life insurance conversion to continue coverage and provide financial relief for your loved ones in the future or you’re interested in selling your term life insurance policy, this guide is designed to equip you with the tools and knowledge you need to make confident decisions about your financial future. Since switching from term to permanent life insurance requires careful planning and reflection on your future financial needs, it is imperative to evaluate all of your options when converting term life to whole life or universal life.
Start by finding out what your life insurance policy is worth with the help of Coventry Direct experts. The research you do today can help you create peace of mind for tomorrow.
