Life Insurance Conversion: How Term to Permanent Conversion Works | Thrivent

A term-to-permanent life insurance conversion, or “term-to-permanent” conversion, allows you to extend your life insurance coverage. now you can have a term life insurance contract for 10, 15, 20 or 30 years. instead of letting it lapse, you can change it to a permanent policy without needing a new medical exam. After you switch to the permanent policy, you’ll have a death benefit that lasts your entire life (as long as premiums are paid and the contract holds its value). premium payments for the new policy will likely be higher.

Learn the main differences between term life insurance and permanent life insurance by reading “Term Life Insurance vs. Whole Life Insurance: Everything You Need to Know.” (Whole life is the most common type of permanent life insurance, so it’s a good place to start.)

Reading: What is a conversion period in life insurance

Consider converting term life insurance to permanent life insurance if your financial goals or strategy has changed. Here are some reasons to consider converting your term life policy:

As a term policy approaches the end of its coverage period (or the end of the time you’re expected to make payments), you may want to expand the protection provided by permanent life insurance.

If your health has worsened and you need coverage for a longer period of time, a conversion may be your best (or only) option. You probably won’t have to repeat your medical exam. In most cases, your new policy will be priced in the same risk class that your term contract had. however, you must be within the conversion window of your policy. (If your health has improved since you first applied for term coverage, it may be more cost-effective to open a new policy than to convert.)

Maybe you originally wanted permanent life insurance, but the higher cost kept you from buying it. If you now have the means to upgrade to a longer term policy, a conversion may be the answer. High net worth individuals who have a complex financial strategy sometimes find permanent life insurance helpful.

You may now have responsibility for someone who will always be financially dependent on you (for example, a child with special needs). or perhaps the term of payment of a loan or mortgage was extended. you may also need to update plans for intergenerational wealth transfer. permanent life insurance can help meet the needs.

Life insurance is sometimes used as part of business continuity planning (planning to protect company assets and personnel in the event of a disaster). if unexpected business obligations arise, a conversion can be a path to permanent life insurance.

As you age, your financial goals may simply change. A life insurance policy that stays with you for life can be part of an updated financial approach.

Not sure how much life insurance you need after a move? use this life insurance calculator to find out.

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Term life insurance is designed to last until the end of the time period you select (usually 10-30 years). after that, you may see steep price increases to continue coverage (which would happen after your premium payment period ends). If you are still alive when your term life insurance policy expires, there is no finance payment and no cash value. On the due date, you will be faced with four options:

1. go without life insurance. you decide that your financial obligations no longer require it.

2. renew your term life insurance. Perhaps your family or dependents have changed and you need life insurance for more years than initially expected. Some insurers offer a one-year extension to your existing coverage. you may be able to renew each year for a higher premium.

3. open a new term or permanent life insurance policy. sometimes it makes sense to buy additional protection or buy a different type of policy.

4. convert your term policy. If you plan ahead, you may also have a fourth option: Convert your term life insurance to a permanent life policy. you can choose whole life insurance, for example.

You may be able to convert term coverage to permanent within the limits set by your insurer. You’ll first need to check to see if you have convertible term life insurance. read your policy documents or ask your financial advisor if your term life policy can be converted.

then check when the conversion is available. Some insurers allow you to convert for the entire duration of the contract. however, it is more common to have only one conversion option for the first few years your life insurance is active. For example, a 15-year life insurance policy may allow conversions during the first five years the policy is in effect. a 30-year policy can only allow conversions for the first 10 years.

Some insurers also have a maximum age requirement. you may not be able to convert if you are over 65, for example.

Convert term to permanent life insurance by following these four steps:

1. find your conversion deadline. plan ahead. If you know that a conversion from term to permanent is something you may want to do in the future, pay attention to the dates allowed in your contract. Buy a convertible term life insurance policy early on. If you don’t know the conversion deadline, read your contract documents or ask your financial advisor.

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2. choose the type of permanent life insurance you want. The three types of permanent life insurance that are commonly available are comprehensive, universal, and universal variable.

3. calculate the cost of the new policy. There is generally no direct cost to convert term life insurance to a permanent policy. however, premium payments are likely to be higher. Consider a lower coverage amount in the new policy if you’re interested in keeping premium amounts lower.

4. convert. Decide if you want to make a partial or total conversion of your existing policy. Usually a financial advisor will step in to help with the paperwork. you can expect to review and sign a new contract.

Choose a type of permanent life insurance that aligns with your financial goals and strategy. During a conversion from term to permanent, your permanent life insurance options will vary depending on your insurer. Options may include whole, universal, or variable universal life insurance. there are pros and cons to each of these.

If you switch from a term life insurance policy to whole life, you’ll notice higher premiums and the cash value of the new policy right away. Whole life insurance is the most common type of permanent life insurance, according to the Life Insurance Information Institute. Here are some pros and cons of converting from term life insurance to whole life.

• longer-lasting coverage to help you transfer wealth. Your loved ones will receive a death benefit (a financial payment) when you die, no matter when it happens. There is no expiration date of 10 or 15 years as you might see with term life insurance. you must continue to pay your premiums in full to continue coverage.
• consistent premiums. Premium payments are consistent over the duration of your insurance coverage, as with many term life policies. Limited payment options may also be available with some lifetime contracts.
• cash value. whole life insurance has cash value growth.1
• estate planning. The possibilities of supporting your estate plan may be more affordable with permanent life insurance than with temporary coverage.
• typically higher cost than term life insurance. Whole life insurance premiums can cost more than five times what a term policy costs.
• Premium payments may not have an end date. Some life insurance policies expect payments for the duration of coverage. this could make it difficult to keep paying if your income changes frequently or if you lose your job. Before you buy, make sure your premium payments are affordable in the long run.
• Cash value is not as easy to access as your checking account. You may pay fees or taxes when you access the cash value of a whole life policy.2 Removing the money will also reduce the value of your death benefit. taking too much money can cancel your coverage entirely. it can also make it take longer to meet the goals of your life insurance contract. Always talk to a financial advisor before changing planned contributions.
• lower cash value growth rate. whole life insurance may have a lower growth rate than other investment strategies you might pursue.

Universal life insurance is similar to whole life insurance. Again, you’ll notice the higher premiums and cash value of the policy up front. But universal life insurance generally offers more payment flexibility than whole life insurance. Here are some of the pros and cons of converting term life insurance to universal life insurance:

• longer-lasting coverage to help you transfer wealth. Your loved ones will receive a death benefit (a financial payment) when you die. There is no expiration date of 10 or 15 years as you might see with term life insurance. you must continue to pay your premiums in full to continue coverage.
• Cash value earns interest. Universal life insurance has a cash value. and many insurers offer steady growth in the cash value of your policy. you might expect to see an annual interest rate at which your money will grow.
• get flexibility in paying premiums. adjust how much to pay in your policy, and when, within the limits set by your insurer.
• estate planning possibilities. The chances of supporting your estate plan may be more affordable with universal life insurance than with term coverage.
• higher cost than term life insurance. Universal life policies typically cost more in exchange for cash value and premium payment flexibility.
• Cash value isn’t as easy to access as your checking account. You may pay fees or taxes when you access the cash value of a universal life policy. Taking money away will also reduce the value of your death benefit. taking too much money can cancel your coverage entirely. it can also make it take longer to meet the goals of your life insurance contract. Always talk to a financial advisor before changing planned contributions.
• flex payments have limitations. you’ll want to consider speeding up or slowing down your life insurance contributions. When you reduce premium payments, it affects the future cash value of your life insurance. it may also decrease the death benefit available to your beneficiaries. lowering your premium payments can make it take longer to reach your life insurance policy goals. Always talk to a financial advisor before changing planned contributions. Also, be aware that adding a large lump sum to your life insurance policy may result in the IRS reclassifying it as a modified endowment contract. these contracts have different tax time rules than standard life insurance.
• lower cash value growth rate. Universal life insurance may have a lower growth rate than other investment strategies you might pursue.

Variable universal life insurance3 is similar to both whole life insurance and universal life insurance. What sets this type of policy apart is that its cash value has options for investments in subaccounts, with the potential for higher gains or losses. Read the pros and cons of converting universal term life insurance to variable below. Learn more about how variable universal life insurance works.

• longer coverage to help you transfer wealth. your loved ones will receive a death benefit (a financial payment) when you die. There is no expiration date of 10 or 15 years as you might see with term life insurance. you must continue to pay your premiums in full, and your policy must retain value, to keep the death benefit active.
• cash value with potential for higher gains or losses. the cash value of your life insurance can be placed in fixed and variable subaccounts.
• Investment options give you options for potential long-term growth. The cash value within a policy may rise or fall after you place it in an investment option based on the market.
• get flexibility in paying your premium. adjust how much you pay in your policy and when it is within the limits set by your insurer.
• higher cost than term life insurance. Variable universal life policies typically cost more in exchange for cash value and flexibility in premium payment.
• more complex than term insurance. the varying complexity of universal life insurance can make it more challenging to use. Before you buy a variable universal life policy, make sure you have a clear understanding of the goals you’re trying to achieve.
• Cash value isn’t as easy to access as your checking account. You may pay fees or taxes when you access the cash value of a variable universal life policy. Taking money away will also reduce the value of your death benefit. taking too much money can cancel your coverage entirely. it can also make it take longer to meet the goals of your life insurance contract. Always talk to a financial advisor before changing planned contributions.
• Investments involve risk. If you invest the cash value of your life insurance in market-based investment options, that cash value will be subject to market cycles and investment risks. If your investments perform poorly, you could lose your profits and your initial investment. there is the added risk that you could also lose your life insurance, including the death benefit you originally purchased it for.
• flexible payments have limitations. You’ll want to account for speeding up or slowing down your life insurance contributions. When you reduce premium payments, it will affect the future cash value of your life insurance. lowering your premium payments can make it take longer to reach your life insurance policy goals. Always talk to a financial advisor before changing planned contributions. Also, be aware that adding a large lump sum to your life insurance policy may result in the IRS reclassifying it as a modified endowment contract. these contracts have different tax time rules than standard life insurance.4

There is generally no direct cost to convert term life insurance to a permanent policy. however, your premium payments will likely be higher.

You may be able to convert all or part of your term life insurance to permanent life insurance. If you choose a full conversion, your new coverage amount will be the same as you had for term insurance. For example, if you have a $250,000 death benefit through your term life insurance, your new permanent life insurance contract would also be $250,000.

If you choose a partial conversion, you will convert only a portion of your existing life insurance. When you’re done, you’ll have stacked life insurance coverage, with a term policy and a permanent policy active at the same time. This typically costs less in the long run than having permanent life insurance alone, because you still have some active term coverage. For example, if you have a $250,000 death benefit through your term life insurance, you could use $150,000 for your new permanent life insurance. and keep the other $100,000 of your death benefit with your existing term life coverage.

Ready to learn more about your life insurance options? connect with a financial advisor near you.

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