What is life insurance conversion?

When weighing the pros and cons of different types of life insurance, people are often drawn to term policies because they're typically less expensive. Plus, they generally offer a death benefit that provides solid financial protection. On the con side, term policies are temporary. After the term is over, a lot of people feel frustrated that they don't have much to show for all those years of paying premiums.

Permanent insurance, for example, whole life or universal insurance, is appealing because it typically builds cash value in addition to providing coverage. Unfortunately, the price of permanent insurance is generally higher than term insurance.

A life insurance conversion lets you change all or a portion of your term life insurance policy into a permanent life insurance policy. It's helpful because many companies allow you to convert your term policy into permanent coverage without having to undergo a new medical exam. Check your policy documents or contact your insurance company to see if there are limits to how much can be converted without a medical exam.

Converting from term life insurance to permanent life insurance

A conversion option, or conversion privilege, is common in the life insurance industry. The conversion process is usually simple: Policyholders request to convert a portion of their term life insurance policy into a permanent life insurance policy. In doing so they can typically skip the underwriting process and have coverage within a few days.

Because most conversion options have an expiration, it's important to check the date carefully because it doesn't always coincide with the end date of the guaranteed term period or the end of the contract. The conversion option can sometimes expire years before your coverage is set to change.

Depending on your provider, you have options regarding the type of permanent insurance you convert to.

The best time for a life insurance conversion

Maybe you've had a change in health, and you still need the coverage. Maybe your discretionary budget has increased, and you can now afford the cash value life insurance you wanted in the first place. Or most importantly, maybe your needs are better addressed with a permanent life insurance policy.

People convert to permanent life insurance policies for a few reasons:

• They want to have life insurance protection for the rest of their lives, regardless of their health.
• They appreciate the cash value component that could grow over time to provide additional funds for their future needs.
• They're addressing gaps in their coverage that permanent insurance is better suited for, such as legacy planning.
• They want to be able to budget and plan for consistent, fixed premiums, such as may be the case with whole life insurance.

Convertible life insurance: Does it apply to all policy types?

Not necessarily. It depends on the specific policy and the insurance company. Some guaranteed issue term policies may not be convertible, for example, and if they are, it may be at a standard health rating.

If you have private life insurance, keep in mind that conversion privileges typically have expiration dates.

When it comes to employer-offered life insurance, or group life insurance, the option to convert may or may not be available. It's usually referred to as a portability option and switching from group to private insurance often requires underwriting.

SGLI and VGLI conversion

The U.S. Department of Veterans Affairs, or VA, offers Servicemembers Group Life Insurance (SGLI) and Veterans Group Life Insurance (VGLI) term benefits to service members and veterans. The VA also offers a conversion option to move into a privately-owned commercial policy.

If service members are covered under the SGLI program, they can choose to convert their coverage to an individual commercial policy within a 120-day window after separating from the military. The conversion has to be to a permanent policy, but they can do so without having to provide proof of good health.

VGLI policyholders can convert their coverage to an individual permanent policy at any time.

You can learn more about SGLI and VGLI conversion from the VAOpens in New Window.‍ ‍

How to request a life insurance conversion

If you're ready to convert your term life insurance policy into a whole life insurance policy, first contact your life insurance company and request information about doing a conversion. Your company will then provide you with the details and the necessary forms and information to complete the conversion process.

There are pros and cons of converting. Although it's a simple process, keep in mind the following considerations:

• Insurance is a key component of a solid financial plan. What role will permanent insurance play in accomplishing your financial goals?
• You may have to pay higher premiums, as permanent life insurance policies typically have higher premiums than term life insurance policies.
• You may have the option of converting part of your term policy. If you go this route, be sure to budget for the total amount of maintaining the remaining existing term and the newly converted permanent insurance.

As part of your research, ask yourself these essential questions to find the coverage you need.