There are two main types of life insurance policies to choose from: permanent life and term life. Unlike permanent life insurance that never expires and has cash value, term life insurance has a timeframe — five, 10, 20, or 30 years. If you outlive your term life policy, you must reapply for coverage. If you’re older, you may not be able to get a 20- or 30-year term due to health issues.
In your 40s and 50s, your life insurance needs change. You need a life insurance policy that helps you prepare for retirement and includes some type of coverage for long-term care. A term life policy does not offer that, but a permanent life insurance policy does — and it never expires.
For this reason, it is good to consider converting a term life insurance to a permanent life insurance policy.
What is a convertible term life insurance policy?
A convertible term life insurance policy is one that expires after a set period of time but can be converted to a permanent life insurance policy.
Not all term life insurance policies can convert to permanent life insurance. For those that can, there is a window of time to exercise the conversion, known as the conversion period or conversion window. The conversion period will be outlined in your policy.
Some insurance companies will allow you to convert with the first five years of the term policy. Other companies have a conversion window within the first 20 years of the term. Some insurance companies will not allow you to convert a term policy is you are 65 years or older; it really varies. Talk to your life insurance agent about whether you can convert your term life policy.
How to convert a term life insurance policy to permanent
Before purchasing your term life insurance, ask your agent if the policy is convertible. If your term policy can be converted, it will be outlined in your policy along with the conversion period.
When you convert term life insurance to permanent, you take a portion (or all) of your term insurance and changes the coverage to permanent, according to Maria Roloff, a wealth advisor at Northwestern Mutual Insurance. If you convert part of your term life, you will have two separate policies — one term life and one permanent life.
Roloff noted that you do not need to go through the insurance underwriting process again when you convert your term life policy to a permanent life policy. This means you won’t be required to complete a medical exam or answer questions about your lifestyle; your health insurability is locked in from the time you first purchased your term life insurance policy.
When you make the conversion from term life to permanent life insurance, understand that there are different types of permanent life insurance policies, such as whole, universal, and variable life, and they handle the cash value portion of your policy differently in terms of where your money is invested. It’s important to talk to your insurance agent or financial planner about the differences between the various permanent life insurance policies to understand what works best for your situation.
Permanent life insurance is more expensive than term life because it has a cash value. Therefore, you can expect to pay considerably more.
Benefits of converting a term life insurance policy to permanent
Life insurance is the optimal way to prepare for retirement, according to Rosalyn Glenn, a financial advisor with Prudential. As she explained, “You can use life insurance to generate income for yourself in retirement because the permanent life insurance policy builds up cash value. So when you’re 65, you can set it up to pay you a monthly income.”
She cautioned that she has met many 55- and 60-year-olds who had term life insurance but didn’t convert it. Now they are older with health challenges and can’t afford to pay the premiums to insure themselves.
Consider a combination of term and permanent life insurance
To avoid ending up without insurance coverage when your term life insurance policy expires, consider a combination of term and permanent life insurance. Roloff recommends that clients “blend permanent and term life to fit their budget while allowing for maximum coverage.”
The benefit of blending insurance is that even if you can’t afford $500,000 in permanent life insurance, having half in term life insurance and the remaining half in permanent life insurance at least gives you the ability to have some coverage that never expires and has a cash value component.
You would need to talk to your insurance agent or financial planner about what combination and blend works for your budget and financial goals.
What if you can’t convert your term policy?
If you are on a fixed income and cannot convert an expiring term life insurance policy to a permanent policy, consider final expense life insurance. This type of insurance is also referred to as burial insurance because the death benefit is low — usually only enough to cover funeral and burial costs.
If your age or health prevents you from getting a traditional term life policy, no medical exam life insurance is another option. Final expense is a type of no medical exam life insurance that is guaranteed, regardless of your health. Simplified issue is another no medical exam life insurance, but requires a health questionnaire, and it has higher death benefits than final expense insurance (up to $100,000).
Talk to your insurance agent and financial planner to see what life insurance works best for your financial situation, budget, and goals.
Ronda is an attorney, writer, and entrepreneur. She is a contributing writer for the Huffington Post. Originally from Chicago, she has lived in Los Angeles and New York. She loves to travel and is passionate about education equity, especially for first generation college students.