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Can I Convert Whole Life to Term Insurance?
Can I convert whole life to term insurance? We’ll explain the different policy types and why you may want to convert your coverage. The short answer is, sometimes, but it may be difficult.
What Is Term Life Insurance?
Term life insurance is typically the most affordable type of coverage. With a policy length ranging from 5 to 30 years depending on your insurer, you can shop based on your needs and budget.
Term coverage is the most affordable due to the lack of a cash savings feature and because your coverage will eventually expire. However, having a contract that expires leaves you with the risk of outliving your coverage. If you outlive your term length, you will either be left uninsured or must shop for a new policy that will have more expensive premiums due to your age and any health conditions you may have developed. If you reach the end of your term and have not passed away, your policy will expire, and you will not be refunded any of the premiums you have paid over the years.
Want to learn more about what happens to term life insurance if you don’t die? You can read more here.
What Is Whole Life Insurance?
Whole life insurance is a type of permanent policy. Permanent policies do not expire so long as you pay your premiums. They also come with the added cash value component. While the premiums are significantly more expensive than term contracts with the same death benefit, a portion of your payments goes towards the cash value fund that accumulates value to provide you with value during your lifetime. The cash fund can be accessed to supplement retirement, pay for education or medical bills, or add to the death benefit your beneficiaries receive in the event of your death. Permanent life insurance is an asset that can be used to build wealth for your lifetimes and your loved ones. You can read our article on that here.
Can You Convert Whole Life to Term Insurance?
While it's often straightforward to convert from term to whole life, the reverse is not always as simple. Most insurers tend to discourage lowering your coverage.
However, if you have already built up a significant value in your cash component, you do have some options to switch to a term contract. You will generally have three options to convert or reduce your premiums depending on your insurer and contract:
- Reduced paid-up
- Extended term
- Reducing your death benefit amount
There are “reduced paid-up” options that will help reduce the burden of your expensive premiums, though it will impact your death benefit value. Reduced paid-up options can allow you to convert your cash value into a single premium that pays off the remainder of your coverage upfront. This will ensure you do not have to pay any premiums for the remainder of your lifetime, but your death benefit will go down significantly with this approach.
There may be an “extended term” option in your contract, which allows you to use the cash value you have accumulated to convert your contract to a term policy. This will take the amount you have built up over time and use it to pay your premiums, but only for a limited time determined by the amount you have in your fund. This is the easiest solution if the period length suits your needs. If it does not provide adequate protection over a long enough period, you may find yourself without coverage when you need it.
For extended term or reduced paid-up options to work, you will need a significant amount of cash value built up in your policy already. Because the cash value is replacing your premium payments to ensure you are no longer paying monthly, this may be a worthwhile solution to you. It is essential to go over your options with your insurance agent or financial advisor prior to making a decision to ensure you are still meeting your financial goals and protecting your loved ones.
If you do not have a significant cash value built-up, converting your policy will be very difficult. You may want to consider lowering the death benefit of your whole life coverage to reduce your premiums. Most insurers allow you to do this at any time. Lowering your death benefit to reduce your premiums also allows you to raise it again in the future if you are financially able, which you would not be able to do as easily with term coverage.
Can You Cancel Permanent Life Insurance?
If you're looking to cancel your coverage instead of converting, read below before you stop making payments – it could save you thousands of dollars.
There are two options to end your coverage without replacing it with a more affordable term policy: cancel and request the surrender value, or sell it to a third party. These options result in you getting money back.
Surrender value is a cash payout composed of your policy’s cash value that has been accumulated minus any surrender fees and penalties your insurer may charge. It’s important to consult the fine print of your contract before canceling with your insurer and requesting the surrender value – the penalties and fees can be expensive. Part of the premiums you have paid towards your policy have been accumulating value in the cash fund portion of your insurance. While there may not be much value in the first few years, if you have been making payments for a long time, the cash accumulated could be thousands to tens of thousands of dollars. If you are not interested in converting and putting that towards a term policy or a reduced paid-up option, make sure you are getting some of that money back.
If you decide to sell to a third party, that is often referred to as a life settlement. Like any other asset, permanent life insurance can be sold. The buyer will take over the premium payments and become the new owner of the policy. When the insured (you) passes away, they will collect the death benefit. While the burden of premium payments will be off your hands, this option means your buyer collects the death benefit, leaving your beneficiaries without financial protection.
Most life settlement buyers are interested in buying a policy from someone age 65 or older who is in poor health. They may not offer you the full face value, either – you may be offered as little as 25% of the policy’s face value. On the other hand, converting will still provide you with some coverage and a death benefit.
Like any sale, there will also be taxes and fees involved. There may be heavy commission fees and you will likely owe tax on any amount you make from selling. If you want to learn more about whether you can cancel permanent life insurance and the best way to do it, you can read our article on the subject here.
If you do not want to convert, the best option is typically to cancel and claim your policy’s surrender value from your insurer. When making financial decisions about your assets, including your life insurance policy, it’s important to consult your financial advisor or an insurance agent. Since everyone’s situation is different, it may help to give us a call and walk through the best options for you. Call us at (800) 521-7873 and tell us a bit about your current financial situation and your coverage needs, and we can explain your options.
Can You Convert Term to Whole Life Insurance?
Usually, yes! While it can be difficult to convert from whole life to term, the reverse is often much simpler. If you already have a policy in place, simply consult the terms of your contract to review your conversion options. There may be some restrictions that require you to switch policy types within a certain number of years from when you first bought your policy, or that require you to switch prior to turning a certain age. As long as you are within the restrictions set by your insurer, conversion from term to whole life is as simple as: application, underwriting, approval. In most cases, you will not have to submit to a new medical exam.
If you are shopping for insurance and want to make sure you have the option to convert your coverage down the road, it is essential to communicate with your life insurance agent while you shop. They will help you find the policy that meets your needs best and includes the option to convert. They will also help you understand any restrictions in place to make sure you are aware of any restrictions or additional requirements down the road. If you are interested in learning whether you should convert term life insurance to permanent, you can read more here.
Bottom Line
Converting your life insurance policy from whole to term may be complicated or leave you without protection when you need it. It is essential to consult with your life insurance agent or financial advisor when making a decision to ensure your needs are met and your loved ones remain protected. There may be alternatives to converting your policy that better suit your needs while still reducing the financial burden of expensive premiums. Let us help you determine what option is right for you! You can do so right here on our website or give us a call at (800) 521-7873.
