When to Convert Term Life to Permanent: A Financial Planning Guide

Term life insurance is more affordable than permanent life insurance. But unlike permanent life, term life only lasts a set period, then you have to undergo a medical assessment for a new premium and policy. Most insurers let you convert your term life insurance to a permanent one. Is it worth it?

In this life insurance guide, we will go over when conversion makes sense, pros and cons of term life vs permanent life insurance, and ideal timings.

Understanding the Basics

What Is Term Life Insurance?

Term life insurance is lower cost than whole life insurance. It provides temporary life insurance coverage for a set period, such as 10, 15, 20, or 30 years.

Term life insurance is generally designed for income replacement during your working years. If the policyholder passes away, the term life insurance’s death benefit can help replace lost income and provide financial support to loved ones.

What Is Permanent Life Insurance?

Permanent life insurance offers lifelong coverage as long as you pay your premiums. It comes with a cash value component and other advantages.

There are various types of permanent life insurance. While you may see whole life used interchangeably with permanent life, it is actually a type of permanent life insurance. Common ones are:

Whole life: Premium payments are fixed throughout the entire whole life policy. Has good cash value growth, a guaranteed death benefit, and may have other benefits.

Universal life: Premium amount varies. More flexibility than whole life policies, but weaker cash value growth and guarantees.

Indexed universal life: Premium amount varies. Has a guaranteed minimum death benefit. The interest credited for the policy uses an external index, which can be helpful.

Variable universal life: A category of universal life. Offers greatest upsides but has worst potential downsides. Cash value depends on investment subaccount performance.

What Is Term Conversion?

Term conversion refers to switching from your term life insurance to a permanent life insurance without medical underwriting. It would grant you access to a cash value component that grows over time. You would also be able to take out a loan against the cash value.

Insurers offer this option because they benefit from policyholders going for permanent life insurance. After all, that’s potentially a lifetime of premiums every month.

What Is Partial Conversion?

You can also opt to do a partial life insurance conversion if your insurer allows it. It only converts a portion of your term life insurance to permanent life. The term life death benefit becomes smaller and the premium can lower correspondingly as well. The part of your term life you didn’t convert will remain active until the original end of term.

If you do a partial conversion, you would have to pay two premiums at the same time. In a way, it splits your term life insurance into two distinct policies, one of them being a smaller permanent life insurance policy. Partial conversion might make sense if:

• You want to only provide a part of your term life insurance death benefit to your beneficiaries
• You don’t want to pay significantly higher premiums for whole life insurance

Breakpoints: When Conversion May Be Most Valuable

There is no absolute best time for a term life insurance conversion to permanent life insurance. Let’s look at some breakpoints in life where term conversion tends to be the most valuable.

Approaching the end of term coverage

After term life insurance ends, there will be gaps in protection even if you immediately look for a new life insurance policy. Term conversion prevents there from being a lapse in coverage. You never know when a single month coverage gap could make a lifetime of difference.

Changes in health

A major factor in how much life insurance costs is health. The more serious health conditions, the more expensive premiums will be. For example, it could be hundreds of dollars more expensive every month if you smoke or don’t smoke.

Conversion can help you save a lot of money because it lets you secure permanent life insurance coverage without any new medical exams.

Family/financial milestones

Certain milestones in life, such as marriage, children, buying a home, and business succession planning, may benefit from you converting your term life to whole life.

Estate planning needs

Do you have a large estate? The federal estate tax threshold was $13.61 million in 2024. When estate planning, it’s important to know how taxes can impact heirs. Term life insurance is considered a part of the estate for estate tax reasons. By converting to permanent life insurance, the permanent life insurance can be used to pay the estate tax.

Individual differences matter. An estate attorney can help you see what life insurance choices are best for your situation.

Cost Trade-Offs

There are advantages and disadvantages to converting your term life insurance to a permanent one. Let’s go over the pros and cons.

Advantages of Converting

Guaranteed insurability: Even if you have any health or lifestyle changes, term conversion typically is allowed.

Access to cash value accumulation: Term life insurance policies do not have cash value. Unless you have special life insurance riders, coverage benefits are limited.

Lifetime protection: Buying permanent life insurance means you don’t need to worry about it expiring. As long as you are properly paying premiums, permanent life coverage will stay active.

Tax benefits: Permanent life insurance can offer various tax benefits, such as tax-deferred cash value growth, an income tax-free death benefit, and tax-efficient loans/withdrawals. There can also be estate tax benefits if you have a large estate.

Downsides of Converting

If someone tells you that term life insurance is guaranteed value, they are misrepresenting the situation. There are many possible downsides to term conversion, just like all financial choices. Here are some of the downsides associated with term life conversion.

Higher premiums: When converting to permanent life, there will likely be higher premiums. This is especially true if converted later in life when the insurer will assume you have a greater mortality risk.

Cash value policies: If the permanent life insurance comes with cash value, it will require a long-term commitment.

Not for temporary coverage: You can’t easily cancel the permanent life insurance policy. It can actually be very challenging or expensive to cancel permanent life insurance because you are signing a long-term contract that is expected to last until your death.

Ideal Timing Considerations

Whether you’re converting early, mid-term, or late, there are pros and cons for each choice. You can look at your policy’s projections to see cash value projections, premium amounts, and death benefit amounts. Here are some of the key considerations.

Early conversion

Converting earlier means that you can lock in lower premiums. This can help save you thousands of dollars over the course of the policy.

In addition, an early conversion provides more time to build cash value. If you ever need to, you can borrow against your life insurance cash value. The cash value may be used to pay your premiums, and can grow a significant amount depending on the interest You can also choose to cash out permanent life insurance, also known as surrendering the policy. However, this would surrender your life insurance protection as well and may come with expensive penalties.

Late conversion

If you convert your term life policy late, close to the age limit, then it can be expensive. Too late and you won’t be able to convert it. However, a late conversion might be necessary if you need it for estate planning or legacy planning purposes.

Mid-term conversion

If you convert a decent amount of time after buying, it balances costs with the need for permanent protection. The benefits won’t be as great, but the downsides won’t be as bad either. It’s always a good idea to review your changing circumstances. Whenever there is a big life change, such as marriage or children, it is a good time to consider updating your life insurance policy.

Conversion window

Policyholders need to know the conversion window for their particular term life insurance policy. You can’t convert whenever you want. Most life insurance companies will not allow you to convert at a certain age (e.g. 70). You can also usually only convert while your term life insurance is active.

Who Should Consider Converting?

Individuals with health concerns

People who want permanent life insurance are often worried about their health. These may be chronic health issues or new medical diagnoses. If you wait till the end of your term life insurance to buy a new permanent or term life policy, it could cost a lot of money due to your new health problems.

If you choose to convert your term life insurance during the policy, you can skip a medical exam. This guaranteed issuance can be beneficial and much cheaper than if you buy permanent life insurance straight up and need to go through a medical evaluation.

High-net-worth individuals needing estate liquidity

If you made it big, you’re probably now worried about estate taxes. Federal and state estate taxes can be a significant amount, meaning that it's money your heirs and beneficiaries won’t receive. Estate liquidity is often a priority for people with high net worth. If you want estate liquidity, converting to permanent life insurance might make sense. Permanent life insurance offers estate planning benefits, unlike term life.

Families wanting lifelong protection beyond kids’ dependent years

Parents and guardians with children understandably worry their children will not be able to afford a good life if they pass away. In today’s economy, young and middle-aged adults often struggle financially and need to rely on their parents’ financial support. By converting to permanent life insurance, families can add another layer of protection for their children.

In addition, if you have dependents with special needs, they would benefit from support even after you pass away. A permanent life insurance policy can accumulate cash value and provide more financial support to individuals with special needs.

Business owners planning for succession or key-person coverage

Business owners who are planning for the future of their company should consider converting their life insurance policy. Permanent life insurance can be useful because it can fund buy-sell agreements and key person insurance, assisting with business continuity.

Case Studies and Examples

Life insurance conversion can build a lot of value for you and your beneficiaries. Here are some scenarios where converting term life to permanent can be useful.

• A young professional converts early to lock in lifelong coverage and build cash value
• A mid-career parent converts part of their term policy while keeping some term for affordability
• A retiree converts late to ensure coverage for estate planning despite higher costs

Key Questions to Ask Before Converting

Take the time to consider whether term conversion is right for you. It is a big commitment that offers many potential benefits, but not for everyone. Here are some useful questions to ask yourself.

• What is my long-term financial goal for this policy?
• How much permanent coverage do I truly need?
• Can I afford the higher premiums without straining my budget?
• What does my income expectancy look like?
• What permanent life riders can help me?
• Does partial conversion make sense?

Conclusion

The ability to convert your term life insurance to permanent life insurance can be a powerful tool, but timing is crucial. Converting too early could hurt you if you can’t comfortably pay the premium, while converting late means missing out on cash value growth.

Always assess the trade-offs and consider your long-term goals when thinking about life insurance conversion. Review your life insurance options and consult with a financial advisor to decide if and when to convert.