Key takeaways
- Most term life insurance policies give you the option to convert to permanent life insurance if you want coverage for longer.
- The time frame for conversion and the policies you can convert to vary by company.
- If you’re healthy, you might get a better deal by buying a new policy.
Level term life insurance policies lock in premiums for a fixed time period, such as 10, 20 or 30 years. After that time is up, the premiums jump significantly each year if you decide to renew. Most term life policies give you the option to convert to a permanent life insurance policy if you end up wanting coverage for longer than the original term. But the conversion time frame and policies you can convert to vary by company.
It’s important to compare conversion options when shopping for term life insurance, and to consider alternatives before converting your policy.
What is term life insurance conversion?
Term life insurance conversion gives you the option to convert your term policy to permanent insurance.
Your new premiums are based on the age when you convert and your health when you bought the original term policy. Expect premiums to be higher for the permanent life policy.
But you can keep the permanent life insurance for your lifetime as long as you pay required premiums, and the policy might include a tax-advantaged cash value savings feature, too.
The best term life insurance policies automatically include conversion options. But they can have different time frames for conversion and options for permanent coverage.
A few life insurance companies—including Penn Mutual and Principal—have two versions of their term life policies: a less-expensive version without conversion rights and a more-expensive option that offers conversion. So be careful about which version you’re buying. Generally, having a conversion option is better because it gives you more flexibility in the future.
Byron Udell, an independent life insurance broker in Chicago, says that some of the lowest-cost term life policies have limited conversion options, but you could pay only about 5% more in premiums for a policy with better conversion features.
How and when can you convert a term policy?
Many term life insurance policies let you convert any time during the level term period or to age 70, whichever is earlier. But some companies have shorter time frames—such as the first five or seven years for 10-year policies or the first 10 years for 20- or 30-year policies. The time frame can be even shorter for insurance buyers who are 65 and older.
A few companies, including Ameritas and Guardian, have a short five-year conversion period in their standard policies but let you add a life insurance rider when you buy the policy (for an extra charge) that extends the conversion period to the end of the level term period or age 70, whichever comes first.
MassMutual offers two versions of its term life policies with different conversion options:
- The standard term policy lets you convert up to the 10th year or age 65, for policies that last for 10, 15, 20, 25 or 30 years.
- The extended-conversion policy lets you convert any time during the full policy term.
To convert a term life insurance policy, contact the insurance company or your agent and find out about your conversion options and how much your premiums will increase. You might have several permanent policies to choose from or only one option. You can convert all or just part of your term life policy.
Examples of term life conversion windows
The top-scoring companies in our best term life insurance analysis tend to have long conversion windows.
Types of permanent policies to convert to
The type of permanent insurance you can convert to varies by insurer, and the options can change over time, depending on when you decide to pull the trigger on conversion. You might have a choice among the following types of permanent life insurance:
- Whole life insurance has guaranteed premiums for your lifetime (or to age 121) or is paid up after a certain time period. You get minimum guaranteed cash value growth, and you might receive more money through dividends, depending on the company and its profits.
- Universal life (UL) insurance has flexible premiums. With fixed universal life insurance, the cash value grows by a minimum guaranteed rate and you could receive more depending on the insurer’s investment performance. Guaranteed universal life insurance, another type of UL policy, has minimal cash value but coverage can stay in force for your lifetime as long as you pay the required premiums.
- Variable universal life also has flexible premiums, and the cash value will rise or fall based on the investment performance of your chosen mutual fund-like accounts.
- Indexed universal life has flexible premiums and the cash value can grow based on a complicated calculation tied to a market index. Most IUL policies also have a 0% floor that prevents your cash value from decreasing if the index loses value.
Permanent life insurance has many more moving parts than term insurance, so it’s a good idea to ask for a life insurance illustration for the policy before deciding whether to convert or which option to choose, recommends Robert Bland, CEO of LifeQuotes, a national life insurance broker. The illustration will show the new premiums and what could happen to the cash value and death benefit at guaranteed minimum rates. The illustration can also show how the policy might perform using other investment and cost assumptions.
When conversion might make sense
Converting your term insurance policy to permanent life insurance can make sense if you end up needing coverage for longer than your original policy term.
There many good reasons for considering term life conversion, such as:
- You want a permanent policy to cover final expenses.
- You want a permanent policy to fund a trust.
- You want a policy that builds cash value.
- You couldn’t afford a permanent policy until now.
- You haven’t built up enough savings to help support your spouse if your income or pension were to stop so you need longer coverage.
- The value of your assets has increased and you now need life insurance to help your beneficiaries pay a future estate-tax bill.
- You’ve developed health conditions but want extended coverage, and buying a new policy would be too expensive.
- The conversion deadline is approaching and you don’t want to lose the option.
Term life conversion can be particularly valuable if you’ve developed a medical condition that makes it more difficult to find an affordable new policy. “Convertability is a godsend if you have stage 3 or 4 cancer,” says Bland. “Conversion comes in when you’re uninsurable and you want continued coverage.”
“Think about why you have term insurance in the first place,” says Mari Adam, a certified financial planner and licensed life insurance agent in Boca Raton, Fla. “You might be young and have kids and in 20 or 30 years you might not need as much insurance because you have a lot of money saved up or your debts are paid off. But sometimes those assumptions are incorrect. People tend to underestimate the period of time they need the insurance for and they’re trying to extend that.”
Before you decide to convert, compare the cost and coverage from your conversion options to the cost of buying a new policy. You might find that buying a new policy is more cost-effective.