Term Insurance Conversion – Take advantage Before It’s Too Late

When it comes to budgetfriendly life coverage, Term Insurance is what most people think of. Term life insurance is super affordable and offers great financial protection options for young adults who want to make sure they leave enough money to their surviving loved ones to replace the loss of their income.

It’s important to remember, however, that term life insurance provides temporary coverage and will eventually expire. Even though you can purchase a 30-year policy, sooner or later, it will expire, and if a renewal is offered, it will be based on your current age and will likely be unaffordable.

Smart financial advisors who recommend term insurance as an affordable solution to protect against financial disaster will likely warn clients that term life insurance is a temporary solution for a permanent risk. The key is that term policyholders need to take advantage of their term insurance conversion option before it’s too late.

What is Term Insurance Conversion?

The term conversion clause (or conversion privilege) is written into most term policy contracts. It kind of gives you a “lease with an option to buy” choice in your term life insurance policy. The terms and conditions of the conversion option are not the same with every company, so it’s important to understand before you purchase your policy when the conversion option is available.

The way the conversion works is actually very simple. It allows the policyholder to convert some or all of the death benefit into a permanent policy like whole life or universal life without having to go through medical underwriting. It’s a big deal, and policyholders should understand how it works and when it can work.

How and When Term Insurance Conversion Works?

The best way to explain how term conversion works is to provide a hypothetical example:

Fred Winslow is a 30-year-old married male with two children and purchases a $500,000 term life insurance policy to make sure his surviving loved ones are okay financially if he dies unexpectedly. Fortunately for Fred, his independent agent made certain that his policy has the conversion privilege and took additional time with Fred to explain how it works. Fred’s policy term is 30-years which means he will be 60-years-old when it expires.

Fred knows that he must convert his policy before it expires and that there will be no medical underwriting. Fred assumes that he may not need as much life insurance at 60 so he plans to convert only half the face amount into a universal life policy that his insurer offers. So, at age 60, Fred will be able to purchase permanent cash value life insurance that will cover him for the rest of his life.

The most important part of this example is that Fred’s independent agent made sure that Fred purchased a policy that included the conversion privilege and took the time to explain it to him. In fact, Fred’s insurance company will automatically send him a warning notice when he starts getting close to the conversion cut-off, thereby helping Fred not to ask for the conversion when it’s too late.

Not All Conversion Privileges Are Created Equal

This is where a lot of term buyers get burned. Conversion terms vary widely from one carrier to the next, and the fine print in your policy determines what your options will actually look like fifteen or twenty years from now. Some carriers let you convert into their full permanent lineup — whole life, universal life, indexed UL, even variable UL. Others give you exactly one landing spot, usually a stripped-down universal life chassis. Some let you convert until age 70; others cut you off at age 65. And a growing number of carriers now offer an optional conversion rider that dramatically expands your future flexibility — but you have to add it at application, not later.

Here’s how eight of the most commonly quoted term carriers compare on conversion:

Conversion terms are based on each carrier’s most recent published guidelines and can change; always confirm the specifics of your own policy with your agent or the carrier at the time you convert.

What This Means for You

Four practical takeaways from the table above:

1. The permanent shelf matters. If there’s any chance you’ll want indexed UL, variable UL, or whole life when you convert, don’t buy a term policy that only converts to a single UL chassis. Protective, Lincoln with the extension rider, and Symetra Term 2018 give you the broadest options.
2. Age 65 versus age 70 is a real gap. Prudential and Foresters generally cap conversion at 65. If you’re buying at 40 with a 30-year term and expecting to convert late in life, you may run out of runway before the term ends.
3. Add-at-issue riders are cheap insurance. Protective’s Conversion Choice with ExtendCare, Lincoln’s Convertibility Extension Rider, and Symetra’s Conversion Enhancement Rider all expand your future flexibility for a modest premium today. If you’re on the fence, add them at application — you can’t add them later.
4. Conversion credits exist and add up. Prudential’s Term Elite and Corebridge’s Select-a-Term both refund a portion of your term premiums when you convert early, which softens the sticker shock on the new permanent policy.

Eliminate the Guesswork

Since not every company sends out “conversion warnings” to their clients, and insurance agents come and go, it makes sense for policyholders to contact their agent’s office to arrange for a policy review every year or so. Life events happen to everyone, and it’s not unusual for a policyholder to need more life insurance during their lifetime.

It also makes good sense to convert your term insurance sooner rather than later because the policy you convert to will cost less if you don’t wait until the last minute. Permanent life insurance rates are based on age, health, and death benefit. Even though you don’t have to be concerned about the “health” part, you can save money by purchasing your permanent policy earlier than your term expiration date. It also makes sense to convert your term coverage after you have reduced your debts and do not need as much life insurance as you are currently carrying.

What About Specialty Policies?

Specialty policies are insurance policies that are purchased for a specific purpose, like mortgage protection insurance, divorce-related coverage, or coverage required by a lender. Ordinarily, these are normally 10, 20, or 30-year policies that most people do not renew. Well, guess what? You can convert these types of policies as well (if they contain the conversion privilege) and use your conversion rights to get more permanent insurance without having to deal with medical underwriting.

The most important thing to remember is that not every term policy offers the conversion privilege, and it doesn’t make sense to buy one unless it does. Term insurance can be a great solution for adults who are growing a family and accumulating debt, but sooner or later, everyone is going to need permanent life insurance to carry them through the rest of their lives.

The Best Life Insurance Riders for Term Insurance

Why Buy 20-Year Term Life Insurance – A Case Study

Term Life Insurance – The Ultimate Guide

What to Do When Your Term Life Insurance Runs Out

Can I Extend My Term Life Insurance Policy?

The Bottom Line for Term Insurance

It’s important for insurance shoppers to understand that term insurance is popular because it’s cheap. It’s cheap because it’s temporary, and the insurers rarely have to pay a claim. Smart term policyholders also know that conversion is a better option than renewing and that permanent coverage is your moment to act on the “lease with an option to buy.”