You can easily convert your term life insurance to whole life insurance. And you can do so quite easily with a phone call to initiate it with your agent, a brief bit of paperwork, and a little time. The good news is that you will not have to jump through a series of difficult hoops to get your new whole life policy in place.
Many people actually purchase a term policy with the plan to convert it to a whole life insurance policy at some point in the future. The typical person who buys a policy with the plan to complete a term conversion in the future does so because of a limited budget. If you have done any shopping around and looked at quotes, you know that it is much less expensive to purchase the proper death benefit for your needs by using term life insurance policies. Whole life insurance has much higher premiums.
What Are The Benefits Of Converting To Whole Life?
One of the significant benefits you will gain when converting your term insurance coverage to whole life is that you will avoid taking another medical exam. In fact, you will not be required to answer any health questions at all. Most term insurance policies have a specific period that allows for a simple underwriting process without additional medical exams to process a conversion.
How simple is that process? For most insurance companies, it involves getting in touch with your life insurance agent and completing a few short forms, signing them, and sending them to the insurance company.
You should be aware that all convertible term life insurance (term policies that have a conversion feature) have some restrictions. The most common being that the conversion period has an expiration date. Meaning that you may not be able to convert to a new permanent policy (whole life or universal life insurance) throughout your entire lifetime. Here are few examples of the specific wording of the conversion privilege offered by various insurance companies:
“…you can convert your term policy to permanent life insurance without evidence of insurability. As long as you are still under age 70…” (any time during your 10,20, or 30-year term) Penn Mutual
“VT-20: Convertible to the earlier of the 10th anniversary (VT-20 ECP: 20th anniversary) and the age 65 anniversary – but with a minimum conversion period to the 2nd anniversary.” Mass Mutual
As you can see these two mutual life insurance companies that both have great whole life insurance products have slightly different definitions for their respective conversion privileges.
However, a major plus of both is that they will allow you to convert to any of the whole life products that they are currently offering. In doing your research, you may find that is not always true for every insurance company. Some will only allow you to convert to certain products and oftentimes not a whole life product at all.
There are two other significant advantages that you may receive by converting your term insurance to whole life:
1. You will have a life insurance death benefit that is permanent. That means that if you pass away at 87, there will be something paid to your beneficiary no matter when you die. No more concerns about only have insurance that pays out during a specific period. You may even decide to set up a trust to receive the proceeds from your policy and that trust can be directed to do whatever you like. Many people value this option as it gives them some degree of control over the money from the grave in a matter of speaking.
2. Having whole life insurance provides great flexibility for future estate planning. Many successful people die with significant real estate holdings and business interests. They may not have a specific estate tax problem, however, there is almost certainly a need for their heirs to have a degree of liquidity to handle all of the related issues.
How to Convert Term Life to Whole Life
During the conversion period on your term policy, making the conversion is pretty simple. As mentioned earlier, most level term life insurance policies will allow you a period to convert. For many, it is the entire coverage term but with a specific age limit, 65 or 70 in most cases.
Another tidbit worth mentioning here is that you may be able to make use of partial conversions to convert a portion of your term insurance to whole life. Not all insurance companies will allow that but some convertible policies are flexible when getting the new policy in place.
Most conversions are done by completing a bit of simple paperwork, determining how much of your term policy you would like to convert, and what premium you might owe. Keep in mind that the cost will be based on your attained age when you trigger the conversion and how much coverage you wish to convert. And remember the biggest advantage here, no new medical exam will be required for you.
How Much Does it Cost?
There is no specific cost to use your conversion options, however, always remember that policy premiums for whole life insurance are substantially greater than term life insurance coverage. You probably know that already but it bears repeating. Many people are shocked at the difference in life insurance rates from term to permanent coverage (whole life in particular).
Another added bonus is that some life insurance companies offer term conversion credits when you are moving over to a permanent, cash value type of policy. Very broadly speaking, the company will apply some portion of the aggregate term insurance premiums that you have paid toward the cost of the new policy that you are converting to.
Normally that crediting will apply a discount that removes a little bit of the shock from the increase in premium that you will now pay. Once the discount period is gone, you will be on the hook for the full price of your new permanent insurance premium.
How Long Does it Take?
There is no set period of time that it takes to complete a term conversion. In our experience in dealing with many different insurance companies in over 30+ years, it can take anywhere from a couple of weeks to a month. There's not much work for you to do after completing the initial forms but there is internal processing time with the carriers themselves.
What Are The Drawbacks Of Converting To Whole Life?
The biggest drawback of converting is that some companies severely limit the options that you have available for the conversion. In fact, if you are buying term coverage with an eye toward later converting to whole life, please be sure that the company offers whole life and that they allow you to convert to all of the products they issue. That may mean that you purchase slightly more expensive term insurance now for the privilege of having a great whole life insurance option when your financial situation allows you to make the change.
Also, keep in mind that you will need to have a significant amount of savings or ongoing cash flow to pay your whole life (or other universal life policy) premiums when you make the switch. The term insurance costs for a $500,000 policy may only be $50/month but the same 500k whole life insurance policy might cost you $500/month. Just make sure that you understand all of your options before getting your term policy in place.