What Is a Term Life Conversion Option?

A term conversion option covers you even if your health deteriorates.

Comstock Images/Comstock/Getty Images

A term life conversion option lets you turn your expiring insurance policy into one that can last as long as you do. Because whole life coverage is usually much more expensive than term life coverage, using a conversion option might not seem like a good idea at first. However, whole life policies have features that can make them valuable parts of your overall financial plan.

Term Insurance Basics

Term life policies are relatively straightforward. They last for a set period, called the term. As long as you pay your premiums, the insurer will pay your beneficiary if you die during that time. Once the term expires, your life insurance ends. For example, if you buy a 15-year term policy when you're 30, your life will be covered until you're 45. After the expiration of your policy, you either go without insurance or you buy a new policy. The problem is that the older you get, the more likely you are to die, so the more expensive your new policy would be. Although the risk of dying between 45 and 60 is relatively low, it's still higher than the risk between 30 and 45.

Term Life Conversion Options

Term life policies frequently come with conversion options. These let you change your term life policy into a whole life policy by contacting your insurance company and paying the difference. With this option you don't have to go through an application or qualification process -- the fact that you qualified for the term policy is enough. Some policies even give you an initial credit for some of the premiums you paid on your term policy, which helps defray the cost of the conversion.

Benefits of Converting

The key benefit of taking your option and converting your term policy to a whole life policy is that your coverage won't automatically end as you age. Another benefit is that you usually bring your health rating with you, so you can convert to whole life even if you've become sick. Whole life insurance has broader investment benefits as well. Many policies contain a savings element through which the policy itself can build up value. The death benefit from your insurance policy is tax-free, so a whole life policy can help pay taxes on your estate if you leave a sizable sum to your heirs.

Drawbacks to Converting

The key drawback to converting your term life policy to a permanent one is the cost. Premiums vary based on many factors. But as an example, a 30-year-old woman who might pay $190 a year for a $250,000 30-year term life policy would pay $2,137.50 a year for a $250,000 for a whole life policy. The monthly premium on her whole life policy would be almost as much as the yearly premium for the term policy. Another drawback to converting is that you might have too much term coverage. Term policies that you take out when you're young typically cover your relatively high expenses, such a mortgage and the cost of keeping your children in school. As you age you're likely to pay your mortgage down, to build up savings and to watch your children become self-sufficient. At that point you need less insurance to cover your loved ones. One way to balance this is to do a partial conversion, if your insurer allows it.