What is Life Insurance Conversion?
In life insurance, conversion is the act of turning a term life insurance policy into permanent life insurance. Most term life policies come with a conversion privilege that allows the policy owner to make this change provided they do so before a certain date.
How life insurance conversion works
If you decide to use the conversion privilege in your term life insurance policy and you’re within the conversion period, your life insurance provider will turn your term policy (which has set premiums that would have expired at a certain date) into a permanent policy (with coverage that lasts the insured’s lifetime).
At that point, the insurance provider can adjust the premiums associated with the converted policy. Generally, they’ll be significantly more expensive for three reasons:
- The insured is older than when the term policy was purchased. Older people pay more for life insurance.
- The policy now offers permanent coverage.
- Permanent policies often include a cash value component. That cash value is a savings account within the policy that the policy owner can use in specific ways, like as collateral for a loan.
When exercising a term policy’s conversion privilege, the insured doesn’t have to sit for another medical exam. In fact, the insurance company doesn’t factor in the insured’s health at all. This can make conversion especially appealing to people who were diagnosed with a serious health condition that could make it harder to get a new life insurance policy.
Some group plans (i.e., life insurance through an employer) come with conversion privileges. In that case, the employee has the option to convert the coverage they had through their employer into a personal plan. This can be helpful if they leave that company.
Conversion privilege options
When you convert a term policy, you can choose to convert the whole policy, meaning your new permanent policy will have the same death benefit as the term policy had.
Alternatively, you can choose to only convert a portion of the policy (e.g., choose a $500,000 death benefit instead of the $1 million benefit the term policy originally had). In that case, the premiums would be more affordable than if you had converted the full policy.
Additionally, when you convert a term policy, you will likely have options as far as what type of permanent life insurance policy it becomes. Review the different choices with your insurance provider to understand how each could work for you.
Life insurance companies stipulate that policy owners need to convert their policy within a certain timeframe. If you have a 30-year term policy, your conversion period might end after 20 years, for example. In that case, you can’t wait until the end of your term because your conversion privilege will have expired at that point.
If you think you may want to convert a term policy — especially if the insured has received a serious health diagnosis — note the date that the conversion policy ends. You may want to set an appointment with an insurance professional to review your coverage options several months before the conversion period ends to ensure you don’t miss the opportunity to make your term coverage permanent.