Converting from Term to Whole Life Insurance

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Life insurance comes in two primary forms -- whole life and term life. Both kinds of life insurance provide a cash payout to your beneficiaries upon your death, but they each offer specific benefits and limitations. Growing older, many people choose to transition a term life policy into a whole life. Let's take a look at the distinctive features of term life and whole life insurance, and why you may want to make the switch.

Term Life Insurance vs. Whole Life Insurance

Although there are variations on each, life insurance takes one of two forms; term life or whole life (sometimes called permanent life). 

Term life insurance provides temporary coverage. You can buy a policy for a 10, 20, 30, or 40-year term. If you pass away during the time in which the policy is in effect, the insurer pays your beneficiaries the amount on the face value of your policy. If you do not pass away during the policy's term, however, the life insurance expires. Whatever money you put in that policy over its life now belongs to the insurance company. People buy term life insurance usually to support their dependents by replacing their own income, as well as to help cover the cost of burial, mortgage payments, debts, or other expenses after their death. 

Whole life insurance, by contrast, offers permanent coverage at a much higher premium. This policy extends for your entire life, providing consistent premiums on a monthly or annual basis. Most people consider a whole life insurance policy to be an investment and include it in their financial portfolios. In addition to providing a death benefit like term life insurance does, whole life insurance also develops equity, which grows at a fixed interest rate over time. In some cases, you can borrow against the equity in your policy and pay it off from the death benefit. In general, whole life insurance costs 10-20 times as much as term life but offers many more features, too.

Why Convert From Term Life to Whole Life

Many people buy term life insurance when they are young because the premiums are less expensive. Over time, though, needs change as family and finances take their ups and downs. That's why most term life insurance policies are convertible to whole life ones. 

Should you convert your term life policy to whole life? Here are a few reasons in favor of life insurance conversion (and three reasons to stick to your term policy).


Whole life lets you build savings. 

A certain portion of your premium payments goes into a savings account, along with dividends from the company. Many policies even guarantee a specified rate of return. In addition, maybe someday you'll need to get money fast. If you're ever in such dire straits, you could cancel your whole life insurance and receive the cash value of your policy outright. By comparison, term life insurance is not an asset, and it has no cash value. Once your term expires, all of the money you paid in premiums is lost.

Whole life is better for estate planning. 

Here's another way to look at a whole life insurance policy: In essence, it's a savings account. A permanent life insurance plan can help you save and invest for your children and grandchildren since the account will continue to earn interest and offer funding options long after you are deceased. If you don't have much disposable income right now, obtaining such a policy can be a way of forcing yourself to save money.

On the other hand, if you have significant wealth, this policy can be a way of decreasing your tax liabilities by sheltering some of your cash. This is more important for people with very high net worth looking for tax advantages.

Whole life can serve any lifelong dependents you may have. 

If you care for a spouse, child, or grandchild with disabilities, whole life insurance can guarantee income for your dependent after you're gone, whereas a term policy will only payout if you die before your set term expires.

Whole life is flexible

When it comes to making payments, whole life insurance is flexible. You can decide how often you want to pay your premiums and for how long. Thus, like a car loan or a mortgage, you might be able to pay off all of your premiums when you're still relatively young. Once you're done paying, your whole life insurance policy will continue growing in value for the rest of your life. As a bonus, when you sign up for this type of policy, your premiums are fixed from the start. Therefore, if you obtain one when you're young and healthy, you can enjoy lower premiums forever.


Other options can provide a higher rate of return than whole life policies. 

For most consumers with "normal" tax situations (low investment income who primarily make money through employment), other investment products provide a significantly higher rate of return. These include mutual funds, single stocks, or real estate, though these are more volatile than a whole life policy which may have a set rate of return. Still, in the long run, these options are almost always more lucrative. 

Positive returns take a long time in whole life policies. 

The first few years of paying into the cash value portion of the whole life policy may provide no returns at all. It often takes a few years before getting a reasonable rate of return.

Whole life equity is not as liquid as other assets. 

You can sell stocks, bonds, or even real estate, thus turning your investment into cash when you need it. Whole life insurance allows you to borrow against the cash value of your policy, but you also pay interest on what you borrow. 

If you use it as a term policy, you will pay much more.

Let's say you decide to purchase life insurance at age 30. You can buy either a 30-year term policy at a premium of $35/month, or a whole life policy that costs $400/month, each with a death benefit of $1,000,000. Let's look at what happens if you die 5, 10, 20, or 50 years into the policy.

5 years: With a term policy, you've paid $2,100 in premiums, making your financial return $997,900. With whole life, total premiums have totaled $24,000, resulting in a total return of $976,000, a difference of $21,900 in net benefits.

10 years: With a term policy, you've paid $4,200 in premiums, making your financial return $995,800. With whole life, total premiums have totaled $48,000, and you may have $5,000 in equity, resulting in a total return of $957,000, a difference of $38,800 in net benefits.

20 years: With a term policy, you've paid $8,400 in premiums, making your financial return $991,600. With whole life, total premiums have totaled $96,000, and you may have $60,000 in equity, resulting in a total return of $964,000, a difference of $27,600 in net benefits.

50 years: With a term policy, you've paid $12,600 in premiums over 30 years of the policy, and receive no death benefit, resulting in a $12,600 loss. With whole life, total premiums have totaled $240,000, and you may have $500,000 in equity, resulting in a total return of $260,000.*

*However, this represents only a 2.7% APR gain on your money. In an invest-the-difference scenario, investing the premium difference of $365 per month at a market-standard rate of 7% would result in an ending investment balance of $426,850 after 30 years and $1,854,789 after 50 years (with contributions increased to $400 per month). That's a difference of $1,594,789 between the invest-the-difference and Whole Life.

Should I Convert My Policy? Answer these three questions.

Unless you can answer "yes" to these questions, there may be a better investment product for you than whole life insurance.

Do you have a high enough net worth to seriously worry about estate taxes?

This tax only applies to wealth greater than $11.4 million at the time of death. You should not be seriously worried about these costs unless your wealth is estimated to exceed $16 million when you die.

Have you maxed out all other retirement and estate savings accounts?

These include 401Ks, IRAs, and some state-administered savings accounts.

Do you want a self-administered line of credit?

Whole life policies can be borrowed against, which can allow you to borrow money at a lower rate than from most institutions and without needing to apply for financing. Some extremely high net worth individuals can appreciate the convenience and control borrowing from their policy. However, most people in these kinds of income brackets can easily gain financing by leveraging existing assets from traditional sources like banks.

Steps to Converting from Term Life to Whole Life

Your term life policy likely contains a conversion rider. If so, the process is simple. Contact your life insurance company and ask to convert to a whole life policy. The company will supply you with the paperwork you'll need, and the process is free.

Be aware that your term life policy might contain some conversion restrictions. For instance, you might be allowed to convert only after you've had this policy for two or more years. Additionally, your conversion eligibility may end when you reach a certain age. Make sure to ask your agent about potential restrictions.

When you convert, you may have to go through the underwriting process again. Underwriting is when an insurance company evaluates a potential customer's level of risk. When you're applying for life insurance, underwriting often involves a medical exam.

You're more likely to require a new underwriting if your medical condition has changed, if you're seeking larger benefits or extra riders, or if you were never thoroughly underwritten in the first place.

You may be able to choose a partial conversion. For example, imagine that your term life policy has a $1 million death benefit. You could convert just a portion of that amount to your whole life policy: $600,000, for instance. The remaining $400,000 would simply disappear. Consequently, you'd have lower whole life premiums to pay.

Talking with an agent or financial planner is the best way to determine if a life insurance conversion is right for you. You can apply for coverage with PolicyScout and talk to a licensed agent today.


On balance, whole life insurance is a very favorable choice for many people. Yes, the terms, conditions, and options that come with this type of insurance can be complicated and confusing. You might want the assistance of a qualified financial professional to sort all of it out. In any event, once you have your whole life policy, you can start to enjoy the increased wealth and the plain old reassurance that will come with it.