When Is The Best Time To Convert A Term Policy To Whole Life?

Written by Jeff Root

Deciding whether to purchase a permanent life insurance policy or a term life insurance policy is a personal decision that you have to make based on your financial needs and financial goals. Life insurance, if you use it properly, can be a flexible and powerful financial tool that allows you to meet multiple objectives simultaneously.

Some term life insurance policies allow for you to convert your term coverage into permanent coverage provided your policy is still in place. This can be a very powerful move for a few reasons.

For one, when you convert to a permanent policy, you will not need to be medically re-evaluated and will pay rates based on your current age and previously recorded health from when you took out your term life insurance policy.

Another important aspect of term conversion is that it allows you to take your temporary coverage and convert it into permanent life insurance coverage which will now cover you for the rest of your life and also comes with additional benefits such as more policy riders and cash value accumulation.

For many people who own term policies which are able to be converted into permanent policies, the question is not of if they should convert their policy, but when is the best time to convert their term life insurance policy to permanent insurance. To answer this question, we must first look at the features of each product.

Term Life Insurance Features

  • Provides you with a death benefit only
  • Pays out your benefits only if you die while the term remains in effect
  • Easiest and most affordable policy to purchase
  • Purchase for a specific length of time such as five years, 10 years, 20 years, or 30 years, referred to as the term
  • Becomes more expensive as you get older especially after you turn 50
  • If you outlive the policy you have to renew it again to extend the coverage
  • Can be used as a temporary form of additional coverage concurrent with your permanent policy
  • Most of the time it can be converted to a whole life insurance policy when it expires

Whole Life Insurance Features

  • Death benefit covers you for the rest of your life
  • Provides you with death benefits and cash value accumulation would continually builds throughout the length of the policy
  • You have to qualify with a health exam although you can purchase coverage without it, but it will be more expensive
  • It takes 10 to 15 years to build up descendant’s cash value
  • The cash value you earn is based on the return of your investment
  • A portion of that cash value can be borrowed or withdrawing during the lifetime of your policy
  • Perfect choice for estate planning
  • Initially your premiums will be significantly more expensive but over the life of the policy you will save much more

Factors to Consider When Converting Term Life Insurance to Permanent 

There are variables and considerations for choosing life insurance. When evaluating life insurance, you need to consider your personal situation.

When Do You Need the Coverage?

One important factor to consider is when you need the life insurance coverage for. If you know you will need permanent life insurance coverage from a young age, and can afford it, the sooner you convert the better.

This is because your cash value will begin to accumulate faster, and you will also pay the lowest rates when you are younger. For people who are older and approaching an age where term life insurance may soon not be an option, or may soon be rather expensive, converting may be the best option for you.

How Much Longer Do You Have on Your Policy? 

The length of time you have left on your policy plays a large role in whether or not conversion makes sense for you. If your policy is approaching the end of its life, you should seriously consider switching it over to a permanent policy.

You want to be mindful of your company’s and policy’s specific terms because each company has its own stipulations on when you can convert your policy. Some require you to do it within a certain time period of purchasing the policy (usually within the first 1/2 of the policy’s term).

Can You Afford the Coverage Now?

If you cannot afford the permanent life insurance coverage, you should definitely avoid converting your policy. While the extra cash value accumulation is nice to have, the amount you will be saving in premiums on a yearly basis (even if you open up a new term life insurance policy) is likely to outnumber this additional premium by a lot.

Furthermore, you could argue that this saved money could be reinvested elsewhere in order to yield higher returns than a permanent policy would anyways. So, if the time isn’t right, don’t rush into a decision that will put your family in a tight financial position.

Is it More Affordable to Purchase a New Term Life Policy? 

Sometimes you just don’t have the need for permanent life insurance like you may have initially thought. No worries, you can also just apply for a new term life insurance policy. However, this will cost you more than your first policy because you will now be older and potentially have more health risks.

This additional cost should be factored into your financial decision.

Why Should You Convert from Term Life to Permanent Life?

All of the features you would receive from a whole life insurance policy are reasons to transition from a term to a whole policy including:

Cash Value Accumulation

You can built better savings as you are older, and probably preparing for fewer family based expenses (child care or car loans) and transitioning to retirement.

Provide for Lifelong Dependents

If you have a lifelong dependent, transitioning to a whole life insurance policy after the financial obligations for the term policy have expired alongside it can set you and your lifelong dependent up for financial protection.

Estate planning

For those who are looking to offset the cost of estate taxes, transitioning to a whole life insurance policy can provide beneficiaries with the money to handle that. Similarly, you can use the benefits to make tax donations to a non-profit which can also mitigate the costs of estate taxes. Of course, you might prefer taking out a whole policy as a way to provide an inheritance to one child while another inherits your business or your estate.

Health Problems

If you are starting to develop health problems, you need to be aware that the cost of life insurance is going to increase as you age, and as your health declines. If you experience health problems, you should transition to a whole policy so that your family is protected financially and so that you can lock in a lower premium now before things get worse.

Consider that if you take a whole policy out now, you might be able to transition from your existing term policy without undergoing any other medical exams which would keep your premiums in the bracket they were when you originally took out a policy (just adjusted for any additional coverage and the length of the policy).

You can afford it

Most people who take a term policy do so because they cannot yet afford a payment of a few hundred dollars per month for a life insurance policy, especially since they are on the hook for that payment for the rest of their lives. Once you age, you might be in a position to better afford this, and you should.

When is the Best Time to Convert a Term Policy to Whole Life Insurance?

If you took out a term policy at age 20, for 20 years with $100,000 in coverage, you would $9 per month as a male. This amounts to $108 per year. Assume this is a level cost, so for 20 years you pay $108 annually bringing your total cost for 20 years to $2,160.

Option 1: Convert Once You Approach Retirement

At this point, you are now 40. You take out a 20 year term to cover the rest of your family costs but since you have a growing family you need more protection, so you increase the coverage to $500,000. You would pay $31 per month for $500,000 in coverage for 20 years with the option to convert to a whole policy at the end.

You would spend $372 per year for 20 years which is $7,440. Then, that expires at 60. So at 60, you convert to a whole policy for only $100,000 in coverage because your financial obligations are no longer there (your home is paid off, you are retired, your kids are grown). This costs $384 per month which amounts to $4608 per year.

Option 2: Convert at a Young Age to Maximize Savings

Comparatively, had you taken out a whole life policy at age 20, you would pay $72 per month for the same $100,000 in coverage bringing your total to $864 per year for however long you live.

Option 3: Had you taken out a whole policy when you turned 40, for the same $500,000 in coverage you would pay $248 per month or $2,976 per year for the rest of your life.

How do these options compare in the long term? For the sake of argument, the average life expectancy is 80. At this age:

Option 1:

  • You paid a total of $2160 for your first term policy + $7,440 for your second term policy + $4,608 x the remaining 20 years which is $92,160. Your total paid in premiums from age 20 through age 80 is $101,760 and in the end, you receive a death benefit of only $100,000.

Option 2:

  • You paid a total of $864 per year for 60 years which equals $51,840 and your death benefit is $100,000.

Option 3:

  • You paid a total of $2,160 for your first term policy + $2,976 x the remaining 40 years which equals $119,040. In total, you paid $121,200 for a death benefit now of $500,000.

So the point at which you need to convert is going to vary based on age and coverage, but the sooner you do it, the better off you will be.

How Much Does Whole Life Insurance Cost?

With the cost being increased for your life insurance premiums when you convert it into permanent life coverage, it is important to examine the cost before doing so.

The table below shows monthly permanent life insurance rates for people who are in excellent health:

Age $500,000 Male  $500,000 Female  $1,000,000 Male  $1,000,000 Female  $2,000,000 Male  $2,000,000 Female 
30 $160 $136 $272 $232 $504 $416
35 $176 $152 $312 $264 $568 $480
40 $248 $216 $464 $376 $888 $720
45 $416 $328 $760 $600 $1472 $1160
50 $682 $484 $1287 $902 $2508 $1760
55 $1089 $715 $2057 $1331 $4059 $2574
60 $1464 $996 $2712 $1812 $5328 $3552

Frequently Asked Questions About Converting Term Life Insurance

Can a term life insurance policy be converted to whole life?

Yes, you absolutely can. Almost all major life insurance companies offer term policies that are convertible. In many cases, this is described as a rider, one which lets you convert at the expiration of the term. Best case scenario, those riders let you convert without undergoing additional medical exams.

Can I get money from my term life insurance policy?

No, you really can’t. The only way you will get money from a term life insurance policy is if you decide on a “return of premium” term policy and outlive it, in which case all of your paid premiums are returned to you as a refund (which isn’t taxable as income).

Can you take money out of a term life insurance policy?

In almost all cases the answer is “no”. Term policies do not let you take money out like whole policies do.

What percentage of term life insurance policies pay out?

Less than 1% of all term policies ever pay out. This is not because the companies refuse, but simply because 99% of people who take out a term policy will outlive it. Then that money invested in premiums is lost and the protection alongside it.

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About Burial Insurance Coverage

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