Should You Convert Term Insurance to Whole Life Insurance?

A term insurance is a practical move in many ways; it’s an affordable option for people on a budget. A term life insurance policy provides you protection for a predefined period. For instance, the term insured may be between 10, 15 or 20 years, depending upon the agreement in the policy contract. If the insured meets with an untimely demise in the same period, there will follow a payout of the insured amount to the nominee. Of course, there is an economic choice that one is making when they opt for a term insurance as compared to a life insurance policy. In opting for the former, they may be prioritizing economy over expenses, as a term policy has a lesser intrinsic cash value as compared to a life policy, and internal policy charges that life insurance might have. In this case, it is natural that a doubt will emerge in the mind of the potential policy buyer whether they should opt for the more lasting security of a full time life insurance.

Reasons to Convert A Term Insurance Policy to Whole life Insurance

• Debt - An important consideration for making the switch from term insurance to life insurance policy is the present financial situation of the policyholder. The logic of having an insurance coverage, whether it is term or life, is to first ensure that there is freedom from worry about finances in case of death of the policyholder. However, the whole purpose of insurance may be defeated if there is still substantial debt on the death of the insured. Suppose the term policy lapses, and there are no alternative arrangements regarding the debts, the policyholder shall be responsible for passing on considerable debt to their junior dependents. Converting to a life insurance policy could be a good option in this scenario.
• Special nature of dependent  - A term insurance is a pragmatic choice, however, these choices are always premised on certain presumptions. For instance, the expectation is that the child of the insurance holder will eventually attain age and education wherein they will be able to handle the responsibilities themselves. However, in case the dependent is physically handicapped, or suffers from a mental disability, the situation is different. It is unrealistic to expect the dependent to take care of themselves. In this situation, it is almost essential that a life insurance policy is subscribed.
• Change in health scenario - In case there is a deterioration in the health of the insured person, they may consider making the switch once and for all. It is often the case that when a person is going for the term insurance policy, they are in a relatively less insecure frame of mind. With the onset of critical illness perhaps, or in other words, confirmation of the inevitable the priorities might change.
• Savings - The advantage of converting the term insurance policy into a full-time life insurance policy is that it helps in building your cash value over time. This means that converting the term into a whole life insurance policy gives you a good option for increasing your savings. It will also give you the option to borrow against the cash value of the policy, thus improving the client’s credibility with the bank or a lending institution.
• No additional underwriting - Perhaps the most important benefit of converting an existing term insurance policy into a full life insurance is that it will save you the cumbersome process of applying for a new life insurance policy, and negotiating with the insurance companies all over again. It is likely that the policy buyer, over age, has developed further medical conditions, or health disorders, that could prove the negotiation of new life insurance quite problematic. Converting an existing policy with the trusted company will save them the hassle of going through the underwriting process all over again, that too, at such an advanced age. 
• Legacy Needs - At a certain stage in a person’s life, one needs a psychological validation that their life was worth it. The most practical way of leaving behind a tangible legacy to ensure that their immediate lineage continue to reap the benefits of their lifelong savings, is to take the call, and make the decision for converting into a life insurance policy.

Problems with Making the Switch from Term to Life Insurance Policy

Although converting term insurance to life insurance is practical in a lot of situations, it may not necessarily be the best move always. In a lot of cases, the family may not ultimately be in need of the life insurance policy. This happens as the children grow up and they are expected to be able to manage their finances on their own.

• High Cost: The cost of going for a whole life insurance policy can be several times higher as compared to going for a term life policy. The older the age of the person when they are trying to convert the policy, the greater the amount of premium that they are liable to pay. The policy may turn out to be less appealing when a large amount of premium is paid
• Coverage not that important: When is life insurance absolutely essential? When you have several family members depending on you, and they are not capable of earning on their own. Your demise would place a major economic burden on them. However, the situation might not be as unstable all the time. It could be that the children enter into an age where they are capable of earning for themselves, loans taken for financing the house have been paid off and so on. Most importantly, the savings might have accumulated to a substantial level, which offsets worries about financial emergencies in the case of your demise. In such a situation, it might not be absolutely pressing to go for a life insurance. The policyholder may think like a more reassured person, and continue with their term plan.
• Lower returns:Of course, the conversion to life insurance will guarantee the insured that their nominees will receive a payout unconditionally on the event of their death. However, many insurance providers choose very conservative forms of investment for the cash value that is accrued on the paid up premiums. Consequently, the gains that are generated over time may be lesser in value, and it is further corroded through inflation. The insured should think clearly about what they want to leave behind for their loved ones, and decide whether a full life insurance is the best financial option.

How to Do the Conversion

The first step should be to check whether the term plan that you have subscribed to, has an intrinsic option to make the conversion into full life insurance.

The second factor is to check the term conversion period that is being offered by the company. Usually, a company might allow the policyholder to convert at any point of time across the term of the policy. However, certain companies might limit the term within which there is a provision for conversion. 

Finally, the client needs to contact the insurance agent, or the respective insurance provider, and give them the instruction to initiate the conversion. Most likely, an additional underwriting process shall not be assigned, or a life insurance exam shall not be necessitated.

There is usually not a cost to convert a term policy into a whole life insurance policy. However, there is likely to be a change in the rate that is paid for the coverage of the premium. This change will depend on the age at which the conversion is being made; the higher the age, the greater will be the premium that is charged. The amount that is being converted will also affect the premium value. The client shall have the option to convert the full value of the term policy, or just a portion of it. The payment that will be outstanding on a full time life insurance policy with a smaller benefit will be lesser, and the premium on the remaining term life policy will reduce because the benefit has been reduced correspondingly.