Converting term life to whole life: Key benefits, how to make the switch, and questions to consider
Term life insurance is a popular choice for protecting your family’s financial future since it offers flexibility and costs less than whole life insurance. However, as the name implies, term life insurance policies only offer temporary protection that runs out when the term is up.
As your life and priorities change, you may want to convert term to whole life. Let’s say you plan to keep your term life insurance until your children are done with college and become self-sufficient, but they need more time in school just to graduate to a tough job market. Rather than renew your term life insurance or take out a new policy for a shorter term, you consider the benefits of converting term life to whole life to have both lifetime coverage and a valuable asset.
Converting term life to whole life can be a smart financial decision. Not only will you have continuous coverage, but you don’t need another medical exam like you would if you took out a new policy. Here’s why converting term life to whole life can be highly beneficial and a robust strategy for long-term financial planning.
How to convert term life to whole life insurance
First, check your policy documents to ensure conversion is an option for you. If it is, confirm whether there’s a time limit. SBLI policies typically allow conversion at any point before your term runs out or you turn 70, whichever comes first. If you’re unsure about the time limit, our agents are happy to help—just give us a call to confirm your eligibility.
Once you’ve confirmed you’re within the conversion window, all you need to do is contact your SBLI agent. Even if your health or financial situation has changed, there’s no need for another medical exam or to go through underwriting again. The process is straightforward and significantly faster than purchasing a new policy, which typically involves both underwriting and a medical exam.
It’s as simple as updating your address online—your SBLI agent will guide you through the steps and send your new policy documents once the process is complete.
Why convert to whole life?
There are many benefits of converting term life to whole life, even if it comes at a higher upfront cost. Here’s why many policyholders make the switch from term life to whole life:
- Lifelong protection: You may have initially taken out your term life policy to match the duration of your mortgage or see your kids through college, but the term expires when you still need protection. Whole life insurance provides permanent coverage so you never have to worry about the term running out.1
- Health concerns: Whether it’s an accident, illness, genetics, or lifestyle, health issues can happen to anyone at any time. If your health declined since you initially took out your term life policy, converting to whole life ensures you can keep your coverage without needing another medical exam.
- Retirement planning: Whole life insurance builds cash value while term life insurance does not. Life insurance as an asset is a formidable supplement to your retirement assets, which is critical once older adults are unable to work anymore.
- Legacy planning: Whole life insurance guarantees a death benefit for your loved ones after your term life insurance ends. Because it also builds cash value,2 your policy provides additional financial security while you are alive.3
Common Misconceptions About Converting Term to Whole Life Insurance
Myth: Converting term life to whole life isn’t allowed.
Fact: While some term life policies have a time limit in which you can convert, most can be converted to whole life insurance.
Myth: The return on investment is too low.
Fact: Many people believe that they can save money by keeping their term life insurance and investing the difference instead of paying higher premiums for whole life insurance. Investments can be volatile and are not guaranteed to retain value. Insurance is governed by insurance laws and policy contracts, and whole life insurance must build cash value according to those guidelines. Your beneficiaries also receive guaranteed death benefits regardless of how the market is doing.
Myth: Whole life insurance is too expensive.
Fact: While whole life insurance is significantly more expensive than term life insurance, it builds cash value and creates an asset you can access while you are alive. You can borrow against your whole life insurance policy or withdraw cash tax-free, depending on the wording in your contract. It provides substantial financial security that makes the premiums worth it.
Myth: It’s too difficult to convert to whole life.
Fact: Although there may be higher premiums, conversion is very simple. All you need to do is contact your SBLI agent, answer a few questions for us, and we’ll have your new whole life policy documents ready in a few days.
Who benefits from converting term life to whole life?
Many policyholders can enhance their long-term financial security by converting their term life policy to whole life. Here’s a look at who may benefit most from this smart strategy:
Families planning for estate protection
Life insurance proceeds usually stay out of probate, ensuring that your loved ones can cover your funeral expenses and pay their bills while your estate is settled. Whole life insurance ensures a guaranteed death benefit4 that can help with these expenses or leave a financial legacy to your loved ones that won’t be fought over in probate court.
High net-worth individuals
Whole life insurance policies are a robust element of estate planning to effectively and efficiently transfer wealth to your beneficiaries. Additionally, whole life insurance is governed by insurance laws and your policy contract rather than the whims of the market, diversifying your assets with an extra layer of financial protection. Death benefits also tend to stay out of probate, while your cash and investments are at risk of going to probate.
People whose health declined
Converting term life to whole life means you don’t need another medical exam. If your health declines in the future, converting to whole life ensures you’re protected no matter what, and your premiums will remain the same.
Workers nearing retirement
Whole life insurance creates a financial asset that you can access while you are alive. If your retirement income falls short of your needs or you face unexpected expenses, you can borrow from or withdraw funds from the cash value of your whole life insurance policy.5
The cost of converting term life to whole life insurance
Converting your term life policy to whole life doesn’t involve a specific conversion fee, but it does come with higher premiums typical of whole life insurance. Your SBLI agent can provide an estimate tailored to your policy and needs.
The cost of your new whole life insurance policy is influenced by the following factors:
- Your age: the older you are, the higher the premium.
- The amount converted: you can convert the full value of your term policy, or just some of it. For instance, if the death benefit of your term policy is $500,000, you don’t have to convert to the entire amount. If you opt for a $250,000 death benefit, you’ll have lower premiums.
- Timing: this ultimately depends on the wording in your policy, but some term life policyholders may receive a premium credit if they convert within a certain number of years.
- Type of permanent life insurance product: will you convert to a whole life policy or a universal life insurance policy? Both are types of permanent life insurance but essentially, universal life policies give you more flexibility while whole life offers more consistency. This includes a guaranteed cash value accumulation and death benefit. Good to know: whole life insurance may be more expensive than universal life insurance.
Term life insurance is an excellent choice for providing affordable, straightforward coverage for a specific period, but it’s important to understand its limitations. While the premiums may be lower upfront, they don’t build the financial asset that whole life insurance does.
Whole life insurance goes beyond protection, offering a policy that grows in value over time. With whole life, a portion of your premium contributes to a cash value component, which can serve as a financial resource in the future. Whether it’s borrowing against the policy for an unexpected expense or supplementing retirement income, whole life insurance provides benefits you can rely on for years to come.
At SBLI, we’re here to help you weigh the pros and cons of each option and find the solution that fits your needs—because protecting your loved ones and building a secure future go hand in hand.
Important questions to ask before conversion
Converting term life to whole life insurance is a big step financially. While it is usually beneficial to do so, there are several important questions you should ask both yourself and your insurance professional:
- Does conversion make sense for my financial situation?
- Am I able to afford higher whole life insurance premiums now?
- Can I expect to still be able to afford these premiums through retirement?
- Can I do partial conversion or is full conversion the only choice? If so, which one is best for me?
- Is there a time limit on converting my policy?
- Are there any other stipulations for conversion?
- Would my new whole life insurance policy include additional long-term care and final expense coverage?
Explore your insurance options with SBLI – contact our team to discover the right conversion solution tailored for your future.
Converting your term life policy to whole life insurance can seem like a daunting prospect, but SBLI simplifies it for you. Our professional insurance advisors can help you determine whether you should convert your policy and navigate every step of the process.
Contact SBLI today to speak to one of our licensed insurance agents and find out which conversion option is best for you.
1Guarantees are backed by the financial strength and claims-paying ability of SBLI.
2Withdrawals are subject to ordinary income tax and, if taken prior to age 59 ½, a 10% federal penalty.
3This is designed for general informational purposes on the subjects covered and is not intended to be legal, tax, or investment advice. Information regarding the subjects covered may not constitute the most up-to-date available and no representations are made that the content is error-free. Further, pursuant to IRS Circular 230, it cannot be used to avoid tax penalties or to promote, market or recommend any tax plan or arrangement. You should consult your own legal, tax, or investment advisor regarding your personal situation.
4Guarantees are backed by the financial strength and claims-paying ability of SBLI.
5Loans will reduce your net cash value and net death benefit and may be subject to interest charges. Unpaid loans are subject to ordinary income tax and, if taken prior to age 59 1/2, a 10% federal tax penalty.
Whole Life Policy form series: 21-P-PWL & 21-P-PSPWL.
SBLI Term Life Insurance policy form series B-56.
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