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Pros and cons of converting term life to whole life

Shelly  Gigante

Posted on May 05, 2023

Shelly Gigante specializes in personal finance issues. Her work has appeared in a variety of publications and news websites.
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Highlight the key benefits of converting term life to whole life insurance. 

Provide examples of term life policy owners for whom a conversion to permanent life insurance may not be ideal

Explain who might be best suited to a term-to-perm conversion, including those who wish to leave a financial legacy

That term life insurance you bought when your kids were young is an important part of your financial safety net, providing maximum income protection at an affordable price. But it does come with a caveat: such policies, by design, provide coverage for a limited period of time, leaving your heirs with no death benefit if you outlive the policy.

To be sure, term life insurance may be all the coverage your family needs, but if your income, financial priorities, or health status have since changed, you may have the option to convert it to a permanent life insurance policy to lock in your coverage.

One reason for a conversion to permanent coverage is that it may enable policyowners to accumulate cash value to help meet their retirement and other long-term accumulation goals.

Permanent life insurance also guarantees a death benefit to your beneficiaries for as long as you maintain your policy, not just for a fixed period of time. Thus, permanent policies are often favored by those looking to enter their golden years with a way to pay for final expenses, provide additional financial security to a surviving spouse, or leave a financial legacy for children or grandchildren.

“You have to consider the individual’s financial need, but permanent life insurance can make a lot of sense as a long-term planning tool,” said Alex Panas, in an interview, a partner and wealth planner with Synthesis Wealth Planning in Morristown, New Jersey. “A lot of people buy term insurance early in their lives when they may not have the cash flow to pay for a permanent policy, but as their income improves or expenses go down it may make sense to convert the policy.” (Calculator: How much life Insurance do I need?)

That said, converting to a permanent policy, such as whole or universal life, typically costs more. Jeremy Hallett, founder of online insurance marketplace Quotacy, said in an interview that premiums are typically 10 times higher for whole life policies than they are for term life policies with the same death benefit because permanent insurance provides coverage for life with guaranteed level premiums. Actual premiums will depend on individual circumstances. (Learn more: Benefits of permanent life insurance)

Before consumers commit to a term-to-perm conversion, financial professionals suggest that they educate themselves on what they’re potentially gaining and what they may be giving up.

“It’s important to rely on guidance from a strong financial professional who can guide you through buying decisions so you don’t make an inappropriate choice,” said Marv Feldman in an interview, chief executive officer emeritus of LifeHappens, a nonprofit that seeks to educate consumers about insurance products and the insurance industry.

Here’s a look at the top five questions you should ask when contemplating a term-to-perm conversion:

1. Do all term life policies allow for conversions?

Many, but not all, term life insurance policies include a provision that allows policyowners to convert to a permanent policy at some point during the policy’s term. Most also offer the option to continue the term, but the premiums are generally much higher.

Typically, insurers charge a slightly higher premium for the option to convert, but some also offer a credit for a portion of the new policy premium in the first year. This may help offset the initial cost associated with conversion.

Convertible term life policies differ by product and insurer. Each has its own limitations and deadlines. For example, some allow policyowners to convert at any point before their term expires, while others allow conversions for only a specified period of time, say, the first 10 years. Such policies may also impose age restrictions that only allow conversions until age 75. Longer conversion periods can significantly increase costs. If choosing a term policy, consider both the conversion provisions and the policies available to convert to. (Learn more: Not all term insurance is the same)

Check your term life policy for deadlines and restrictions, or contact your financial professional for guidance.

2. Who might not be a candidate for conversion?

A term-to-perm conversion doesn’t always make sense, especially if you only want coverage during the years your family is most financially vulnerable, said Panas.

And in some instances it could be argued that someone may not need life insurance (term or permanent) if his or her resources (assets and savings) are sufficient that their household would not suffer a financial hardship if the primary wage earner died unexpectedly. Of course, such circumstances are rare for the majority of people. And, logically, you don’t know if your resources are sufficient unless you know exactly what you and your family may face in the future.

It may also be best to stick with your term life coverage if you can’t afford the premiums associated with a permanent policy that provides the same level of death benefit coverage. While term life can offer more affordable premiums for the same coverage amounts, remember term life insurance will only pay a benefit if you die during the coverage duration. (Related: 4 times when term may be the answer)

“I often come across people who may prefer the long-term security of a permanent life policy, but they need a bigger death benefit than they can afford,” he said, noting that term life coverage, which offers a bigger benefit for smaller premiums, is generally the better bet in that case. “It’s all about cash flow.”

As you weigh the pros and cons of conversion, don’t forget to consider your income stability. If you fear you might not be able to keep pace with the higher premium payments of a permanent life policy if your income suddenly dropped, it may be wise to keep your term life policy as is, which generally would keep your payments smaller. Remember, failure to pay your premiums on time means your policy would lapse and your family would not receive a death benefit.

3. Who might benefit from a term-to-perm conversion?

Permanent insurance is typically seen as a way to provide a basic amount of coverage to pay final expenses, support a surviving spouse, or leave a legacy for surviving family members. It also offers options for handling sudden expenses, like costs associated with a medical issue or emergency home repair, or longer-term financial challenges, like college tuition or outstanding debt. Of course, tapping cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit. It also increases the likelihood that the policy will lapse, which could result in a tax liability.

Rebecca Murphy, an attorney and financial professional with Skylight Financial Group in Cleveland, Ohio, said that a term-to-perm conversion might make sense if you:

  • Wish to leave an inheritance for your heirs, but want the freedom to spend what you saved for your own retirement. (Learn more: 6 ways life insurance can help with estate planning)
  • Are divorced and want to ensure that a portion of your assets will be left to your biological kids via a death benefit when you die. (Learn more: Divorce and life insurance)
  • Are a high-net-worth individual and wish to potentially minimize the size of your taxable estate by transferring your life insurance policy to a trust. Trusts are complex financial tools, however, that require the expertise of an attorney. (Learn more: 7 situations where a trust might help)

“There are so many advantages to owning permanent life insurance apart from the death protection,” said Murphy in an interview, noting that tax efficiency is chief among them.

Indeed, life insurance offers a triple tax advantage. The cash value accumulates tax deferred, you can access the cash value tax free (up to the cost basis — the amount paid in policy premiums), and the death benefit from your policy is generally paid out to your heirs income tax free. But, again, using the cash value also increases the chance that the policy may lapse and subsequently could result in a tax liability. (Learn more: Life insurance: 3 Income tax advantages)

4. Has my health status changed?

It could potentially also be wise to consider conversion if you experience a serious change in health status that might otherwise preclude you from purchasing a new policy, said Panas. That might include a diagnosis of heart disease, diabetes, or cancer.

Conversion privileges generally do not require policyowners to complete a medical exam, so they would not be denied coverage based on any change in life expectancy, provided they are making the change during the period their term policy allows for conversion.

“This is a time when it really makes a lot of sense to convert,” said Panas. “If someone gets a diagnosis of cancer, for example, or a terminal diagnosis, or for some reason believes that their life expectancy will be lower than they thought, they can potentially convert their policy and guarantee their family a death benefit payout.”

The conversion privileges in term policies don’t always last throughout the life of the policy, however. So, depending on the timing of a terminal diagnosis, this may not always be an option.

5. Can I do a partial conversion?

If you’d like to convert your entire term policy to permanent life insurance, but can’t afford the premiums, you may still be able to complete a partial conversion, if your insurer allows, in which only a portion of your original term life policy gets converted to permanent coverage.

Feldman says that he often counsels individuals to “ladder” into permanent coverage, converting 20 percent of their term life policy every two years as their earnings power grows.

“At the end of 10 years, they would have a fully permanent policy,” he said. “Sometimes, term life insurance is the only viable solution initially because of minimal cash flow, but if you have a convertible policy, you can potentially convert it into permanent life insurance over time.”

For many young families, term life insurance is their single biggest safety net, offering maximum financial protection at the lowest possible price. As their financial picture matures, however, those who seek a permanent solution for longer-term planning goals and those who experience a decline in health may wish to explore the pros and cons of a term-to-perm conversion.

“A term life policy with a conversion feature just gives you more options,” said Feldman.

Just be sure you understand the restrictions involved, and be sure your budget can handle the higher premiums.

Discover more from MassMutual…

9 questions you should ask about life insurance

Term vs. perm life insurance: 3 considerations

Need a financial professional? Find one here

This article was first published in March 2017. It has been updated.


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The information provided is not written or intended as specific tax or legal advice. MassMutual, its employees and representatives are not authorized to give tax or legal advice. You are encouraged to seek advice from your own tax or legal counsel. Opinions expressed by those interviewed are their own and do not necessarily represent the views of MassMutual.