Term life insurance provides basic death benefit protection, that lasts for a set period of time, in exchange for a premium payment that is relatively low in relation to the amount of death benefit you are purchasing.
Whole life insurance, in contrast, provides death benefit protection for your whole life. Premiums may be five to 10 times the cost of term policy premiums. However, whole life policies also build a cash reserve over time that builds up against the death benefit, reducing the amount of death benefit that is actually being purchased, which helps to keep the premiums level when life insurance coverage would otherwise be prohibitively expensive or impossible to maintain (i.e., death benefit costs over age 85).
Term life insurance is converted to whole life using an in-house conversion process by your life insurance company. You must obtain a term policy conversion form from the insurer. Then, you must fill out the form, indicating how much of your policy you want to convert. Finally, you must pay the additional premium amount required on the new policy. You don’t have to convert the full amount of the term policy. You may convert part of the term policy or you may convert all of the policy, but reduce the face amount of insurance (the death benefit), so that the premiums are more affordable for you. Your insurer may credit a portion of your term life premiums to your new whole life policy. This means that your premiums may be lower than they otherwise would be if you just purchased a new whole life policy.
The significance of converting your term policy to a whole life policy is that you convert a temporary insurance contract to a permanent one. You often aren’t required to undergo additional health exams to obtain your permanent policy since the conversion amount results in an equal or lesser amount of death benefit coverage when compared to your term policy.
The benefit of converting a term policy to a whole life policy is that you obtain all of the benefits of whole life insurance. These benefits include a cash value account which grows over time. The cash value account is a savings that you may use for any purpose. Low or zero percent policy loans give you tax-free access to the cash value. Alternatively, you may be able to withdraw a portion of the cash value if your policy pays dividends to the cash value. Generally, withdrawals are limited to the dividends accumulated in the policy. Finally, you gain the benefit of a permanent policy, which will never expire as long as all premium payments are made.
The disadvantage to converting a term policy to a whole life policy is that the whole life insurance policy is much more expensive than the term policy, initially. Depending on when you convert your term policy, the premiums may be up to 10 times the cost of your term policy premiums. If your policy pays dividends, the dividends may eventually be used to reduce your out of pocket premium expense, though the dividends on whole life insurance are not guaranteed. Alternatively, you may use policy loans to pay part (or all) of the premiums provided that the cash value is generating sufficient interest earnings to pay for the premium payments without decreasing the policy’s cash value thus causing the policy to eventually lapse.
Before converting your term policy to a whole life policy, make sure you understand your financial goals. It may be helpful to speak with a financial adviser to ensure that the conversion makes sense for you. While a whole life policy might provide the possibility to reduce or eliminate future out of pocket premium costs, this is never guaranteed to happen. Converting to a whole life policy may require paying premiums for the rest of your life, and you must make sure that you can afford to make these premiums, if necessary.