Convert Term Life to Whole Life Insurance (2024 Guide)

In broad terms, life insurance coverage is offered for a specified time or a policyholder’s entire life. When a policy has a defined end, it is known as term life insurance. Policies that last until a person dies are called whole life or permanent life insurance.

Term life insurance lets a policyholder buy coverage for a period that is generally between 10 and 30 years. Some companies offer shorter terms, and a few offer term life insurance up to 40 years in select situations. If the insured person passes away during that period, the insurance company will pay a predetermined amount to the beneficiaries named in the policy. When the policy period ends, the policy is no longer in force. Coverage can be in small amounts or may be up to millions of dollars, depending on what an insurer offers.

Because of a defined endpoint, term life is usually the cheapest policy you can buy. However, insurers will base actual policy costs on factors such as age, health, occupation and the amount of the death benefit.

Many companies offer term insurance policies. You can get quotes from top term life insurance providers if you want to become more familiar with what various insurers offer.

Whole life insurance is a life insurance policy that provides permanent coverage for the policyholder’s entire life as long as premiums are kept up to date.

Whole life policies differ from term life in that they have a cash value component. This means you can borrow against the premiums you’ve paid into the policy if you have an emergency or want to use funds for any other purpose. Cash value also acts as a savings or investment account that earns interest as it accumulates. If you don’t tap into the cash value, it can be used to pay premiums in the future, possibly when you retire and have less income.

Death benefit limits range up to millions of dollars, and policy costs are more expensive than term life policies because of the cash value component and coverage over your entire life.

Whole life policies have several options, including universal life insurance, indexed universal life, guaranteed-issue and final expense policies that require no medical exam and guarantee you will be covered with some conditions attached. Insurers offer whole life policies within defined age ranges and death benefit amounts. You may need to work with an agent or a top whole life insurance company to see what options are available to you.

For both term and whole life policies, insurers offer ways to customize policies even further by adding riders. Some riders are free, but others may require an added premium. When you buy a policy you can add these riders, including added coverage for your children, accidental death benefits, advance benefit access if you have a critical or terminal illness and many others.

Each insurer will have a specific conversion process to follow in converting your term insurance to whole life insurance, but generally the steps are simple and include the following.

• Determine if your current term policy has a conversion option and ensure that you meet the conversion requirements. The time frame that companies will allow policyholders to convert varies. Some will allow it at any point, but others will carry a conversion period limit.
• Find out if your conversion includes a medical exam requirement in case you have underlying health issues that could make getting a new policy problematic.
• Speak with your insurance agent or a financial professional to get expert advice on whether a conversion is in your best interest based on your current life situation.
• Decide if converting to whole life makes sense from a budgeting standpoint. Whole life policies are more expensive — sometimes significantly more — and you do not want to convert to a policy you can’t afford.
• Ask about converting in stages. You might have the option to convert in installments if that better meets your needs.
• Complete a conversion application, working with your agent if needed to help you answer any questions along the way.
• Choose how you want to be billed for premiums. Based on your preferences, it may make sense to be billed annually instead of monthly or quarterly.
• Consider setting up automatic withdrawals to ensure you don’t let your policy lapse.
• Double-check on who you want as beneficiaries for the policy. You should be doing this regularly, but conversion is an especially good time to give this thought.
• Sign, mail, fax or upload the application.
• The effective date will vary by insurer, but you should ask when the policy will go into effect to have full clarity on this important final step.

Many people convert some or all of their term life insurance policies to enjoy several benefits.

Cash Value Component

Building cash value is a major reason for conversion. Term policies don’t build cash value. With whole life you build equity instead of merely paying into a policy that has lower premiums but offers no payback other than a death benefit. Cash value grows on a tax-deferred basis, and you can surrender the policy to get all of the cash value returned to you.

Estate Planning

Another benefit is that whole life is a good estate planning tool. Term life may or may not provide coverage depending on when you die. If the term is still in effect, your beneficiaries will collect a death benefit. If the term has expired, they get nothing. With a whole life policy, your beneficiaries will definitely receive the death benefit when you pass, assuming your policy is kept current.

An estate planning attorney can help you set up an irrevocable life insurance trust to avoid an inheritance tax on your life insurance proceeds. Your insurance agent will also help you plan and select the right policy. Setting this up correctly is important so that the death benefit is not subject to estate taxes. Your heirs can then use the life insurance proceeds to help pay any estate tax.

Health Concerns

Converting to any type of permanent life policy is also good if you have health challenges. If your health has declined over the years, you might not be eligible for life insurance when your term life policy expires, or it could be prohibitively more costly. Usually, if you convert your term life to a whole life policy, you can do so without having to take a medical exam as part of the underwriting process.

Whole life policies also make sense if you want to care for a beneficiary with special needs. This gives developmentally challenged loved ones and dependents a more thorough safety net with a sufficient amount of coverage to employ when you pass away.

Converting from term coverage to a whole life policy also has some issues and drawbacks to consider.

• Higher costs. Cost is the biggest concern. Depending on your conversion circumstances, you may end up paying significantly more for a whole life policy vs. a term life policy. Your age at the time of conversion will factor into higher premium costs.
• Additional riders. Depending on the life insurance company, you may have to add a conversion rider to your existing term life policy. Sometimes the conversion rider is free, but other companies may charge you a monthly premium for this option.
• Limited options. You may be limited in the whole life policies you can convert to from a term policy. It may make more sense to buy a new whole life or new term life policy if you can’t get everything you want in a converted policy.
• Weak investment vehicle. Whole life policy cash components often produce mediocre returns. Looking at other investment options that pay a more robust return is often a good idea.
• Less flexibility. You may have limited flexibility as to when you can convert a policy. Some insurers allow conversions at any time, but others may limit conversions to the first 10 years of a term policy. Longer conversion periods can significantly increase costs.
• Potentially unnecessary. You may not even need life insurance if you reach a point of financial wealth and stability. A person’s assets and savings might be sufficient so that their household would not suffer financial hardship if the primary wage earner died unexpectedly.

Conversion makes sense for many people, but if you’re unsure whether term or whole life coverage is right, talk with your insurance agent or financial advisor to help you sort through your options. Costs, health, peace of mind and estate planning considerations are key components in your decision process, and you may want to take your time before taking any actions.

Bret Colson is a public relations professional and journalist with more than 30 years of diverse experience. Bret’s background includes senior management roles in public administration and publishing and as the head of his successful consulting practice. Bret currently serves as Senior Editor for Redbird Advisors which serves numerous insurance and financial services companies focusing on advanced life insurance such as bank owned life insurance, key man and buy-sell agreements as well as other ways businesses deploy life insurance.

Sabrina Lopez is an editor with over six years of experience writing and editing digital content with a particular focus on home services, home products and personal finance. When she is not working on articles to help consumers make informed decisions, Sabrina enjoys creative writing and spending time with her family and their two parrots.