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Understand how life insurance works

Converting Term to Whole Life Insurance

This couple feels secure in their decision years ago to convert their term life insurance into a whole life policy.

Term life insurance can provide affordable life insurance for a set span of time. But it also offers flexibility. Many term life policies come with a “conversion clause” that lets you transition them into a permanent life insurance policy. We’ll look at the difference between term and whole life insurance, and the reasons that converting may or may not be for you.

What Is Term Life Insurance?

Term life insurance is life insurance that lasts for a set period of time. The term usually lasts 10, 20, or 30 years. In the event of your death during the term, the insurance will pay a death benefit. You can choose the amount of the death benefit, but a higher benefit means paying a higher premium. If you have short-term debts that you’re worried about covering in the event of your death, term life insurance might be a good fit.

What Is Whole Life Insurance?

Like the name suggests, whole life insurance lasts your entire life – as long as you continue to pay the premium. The policy pays a benefit upon your death, and is generally considered to be the most stable, reliable type of life insurance. Your payments probably won’t increase as you age. And whole life insurance policies build a cash value over time on a tax-deferred basis. That means that you have the option to withdraw the cash value early, but you won’t be taxed on that value unless you do withdraw it. Just know that if you do make a withdrawal, you’ll reduce the death benefit accordingly.*

When Term Life Runs Out

Term life insurance usually costs a fraction of what whole life insurance does. This is because term life insurance seldom has to pay its beneficiaries. If you’re a fairly young person in good health, who’s only getting coverage for 10 or 20 years, the odds are good that the policy won’t have to pay out. That’s good news for people who are looking for affordable coverage for the near future. If you have short-term debt, or if you’re the sole breadwinner for your family, you can get coverage to help protect your loved ones for a relatively small amount of money.

So, if you reach the end of your term life insurance without it paying a benefit, that’s good news! The insurance did what it was supposed to do – it helped protect you and your family in case the insured died.
But over time, you may want more out of your policy. Term policies are more affordable, but you’re still paying money every month. When the term is over, the best-case scenario is that it doesn’t pay out. But at that point, with no benefit and no accrued cash value, some people may start wanting a little more out of their policies. Sometimes, the peace of mind that comes from a policy is all that you need. But if you do decide that you want additional insurance during a term life policy, there is a way to get it.

The Conversion Clause

Many term insurance policies come with a conversion clause that let you transfer your policy over into a whole life insurance policy. Notably, these clauses usually allow you to convert to whole life without having a second medical examination. The clause will give you a set amount of time to decide if you want to do that. For instance, if you have a 20-year term life policy, you might have 10 years to convert it to whole life. Some conversion clauses might have a target age, instead. For those policies, you can usually convert before you turn 75. This lets you treat a term life policy as an affordable test drive for permanent life insurance. There are some compelling reasons that a person might want to use the conversion clause, but there also several reasons not to.

Reasons to Use the Conversion Clause

There are a lot of reasons you might want to convert to whole life. One big reason is that conversion clauses typically don’t require new medical exam. This can make it a great way to secure life insurance in a health crisis. Suppose you’ve had term life for a few years, and suddenly your health changes. Maybe you get a diagnosis for diabetes, or cancer. Normally that diagnosis can make life insurance more costly and harder to get. But if you had convertible term life insurance, you can get whole life insurance anyway. If you’re facing a diagnosis that’s likely to leave medical debt behind in the event of your death, this can be a good way to help minimize the effect of that.
But there are other reasons you might want to convert.

  • You got term life insurance because it was all you could afford, but now you’re in a better financial position to take out more coverage.
  • Your family has grown, and you want to make sure they’ll be financially set long-term in the event of your death. Maybe you want a death benefit that would offset the tax burden of their inheritance, or a trust to help take care of your children.
  • You’re still in your term policy, but you realize you would rather have a policy that also builds a cash value.

Reasons Not to Convert

There are plenty of reasons you might not want to convert your life insurance policy, as well.

  • You bought insurance for a set amount of time on purpose. Maybe you just needed to get through a difficult financial period.
  • Your children are getting older, and you’re no longer worried about having a financial cushion to take care of them if something happens to you.
  • You’re making good progress on eliminating your debts, and you’re no longer worried about passing your debt on to your children.
  • You have other investments that you want to make, in businesses or on the stock market. If you have your money working for you in other ways, then you may not want to spend any of it on whole life premiums. (That being said, there are life insurance policies, like Indexed Universal, that allow you to put part of the cash value into separate accounts that are tied to an index. Sometimes these might be options under your conversion clause, and it’s worth checking to see if they are.)

In the end, the questions you ask yourself when considering a conversion are the same questions you’d ask when buying whole life insurance in the first place. “Is this the best way to provide for my family? Do I want this money to set up a trust, or alleviate a tax burden, or take care of the costs associated with my medical treatment and funeral arrangements?” In the end, these are questions that only you can answer. But now that you know how converting term to whole life insurance works, you’re better equipped to decide if it’s the right decision for you.

Are you interested in learning more about life insurance policy options for you? Do you want more information about the other kinds of policies available? Please ensure to review all of your options before making a decision.


*Mutual of Omaha and its representatives do not provide tax and legal advice, and the information provided herein is general in nature and should not be considered tax and legal advice.

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