How term life insurance conversion works

In the early stages of life, a term life insurance policy may be sufficient for many individuals’ needs. It can provide an affordable way to offer death benefit protection and help loved ones navigate a difficult time without the added strain of financial burdens. However, as life circumstances change, the coverage offered by a term policy might no longer be enough. Whether it’s supporting dependents, taking on new debt, or other evolving responsibilities, it's important that your life insurance still aligns with your current situation. For those in this position, a possible option may be converting a term life insurance policy to permanent coverage.

What is term life insurance conversion?

A term conversion is when a term life insurance policy is converted into a permanent life insurance policy. Many term policies include a provision that permits the conversion of some or all of the coverage to a permanent policy within a specified time frame.

Why should I convert term life insurance to permanent coverage?

Permanent life insurance is the general term for life insurance policies that do not expire. Unlike term life insurance, which provides death benefit protection for a specific period of years, permanent life insurance can last for the insured’s lifetime, as long as premiums are paid subject to the terms of the policy. These policies may also offer the potential to build cash value. The cash value for permanent life insurance policies grows generally tax-deferred, which means you don’t pay taxes on any earnings as long as the policy remains active.¹ Policyholders can access cash value for a variety of reasons, such as building a nest egg for retirement, boosting the death benefit, or to help supplement retirement income through a policy loan.² Compared to term life insurance, permanent life insurance usually costs more in premiums but can offer:

• No expiration date, keep it as long as the required premiums are paid
• Potential cash value growth

Advantages of term to permanent life insurance explained

Converting term to permanent life insurance offers key benefits, including no underwriting requirements for conversion, flexible coverage options that can fit your budget, and the ability to obtain funds for end-of-life costs. These features make the conversion option in life insurance especially valuable as your needs change over time.

No underwriting³

A life insurance conversion is often simpler than purchasing a new policy, as most insurance companies allow individuals to convert term life insurance without the need for additional underwriting. Underwriting is a process that gives insurers a clearer look at an individual’s health history and background when determining their premiums. No new underwriting means that if the insured has developed health issues between when they first bought the policy and now, they won’t affect their premiums. However, it’s important to note that although premiums won't be affected by changes in health, they can still be affected by a person’s age.

Coverage fits a personal budget

If your income has increased since the initial purchase of life insurance, it may be possible to upgrade coverage to a permanent policy, which typically comes with a higher premium. The life insurance conversion option offers flexibility to adjust death benefit amounts and coverage types in line with increased earning power or changing family needs.

Ability to afford end-of-life costs

Funeral costs and final expenses can add up quickly. Converting a term to permanent life insurance policy helps ensure continued death benefit protection so loved ones can cover these expenses during a difficult time.

How to convert a term life insurance policy

Converting a term life policy to a permanent one is generally a straightforward process. The first step is to review the policy details to check if a conversion option is available. It's important to understand the terms, including the length of the conversion period, as this can vary by insurance company. Some companies allow conversions at any point during the policy term, while others impose a specific time frame for conversion.

After confirming the conversion option and timeframe, it’s a good idea to consult with an insurance agent to discuss the term to permanent life insurance conversion in detail and explore the next steps. A few key considerations to discuss include:

Permanent policy options

Some insurance companies may limit the types of permanent policies available for conversion, so be sure to review what policies are available.

Conversion costs

Most term policies can be converted free of charge, but this depends on the life insurance company. The premium, however, may increase depending on different factors.

Converting in stages

It may not be necessary to convert a term policy all at once. Many insurance companies offer the option to convert in installments, providing flexibility to better meet individual needs.

Maximizing the benefits of a conversion option in life insurance

Once the term to permanent life insurance conversion has been reviewed with a financial professional and the details of the new policy are understood, the conversion process can proceed. This transition can provide an opportunity to lock-in long-term coverage and ensure that a life insurance policy continues to meet evolving needs. By understanding the conversion options and selecting the right permanent policy, individuals can maintain financial protection for themselves and their loved ones well into the future. Interested in exploring your conversion options in life insurance with a Midland National financial professional? Visit our contact an agent page.

1. Neither Midland National Life Insurance nor its agents give legal or tax advice. Please consult with and rely on a qualified legal or tax advisor before entering into or paying additional premiums with respect to such arrangements. The tax-deferred feature of the universal life policy is not necessary for a tax-qualified plan. In such instances, you should consider whether other features, such as the death benefit and optional riders make the policy appropriate for your needs. Before purchasing this policy, you should obtain competent tax advice both as to the tax treatment of the policy and the suitability of the product.

2. Policy loans from life insurance policies generally are not subject to income tax, provided the contract is not a Modified Endowment Contract (MEC), as defined by Section 7702A of the Internal Revenue Code. A policy loan or withdrawal from a life insurance policy that is a MEC is taxable upon receipt to the extent cash value of the contract exceeds premium paid. Distributions from MECs are subject to federal income tax to the extent of the gain in the policy and taxable distributions are subject to a 10% additional tax prior to age 59½, with certain exceptions. Policy loans and withdrawals will reduce cash value and death benefit. Policy loans are subject to interest charges. Consult with and rely on your tax advisor or attorney on your specific situation. Life insurance policies have terms under which the policy may be continued in force or discontinued. Permanent life insurance requires monthly deductions to pay the policy’s charges and expenses, some of which will increase as the insured gets older. These deductions may reduce the cash value of the policy. Current cost of insurance rates and current interest rates are not guaranteed. Therefore, the planned periodic premium may not be sufficient to carry the contract to maturity. For costs and complete details, refer to the policy or call or write Midland National Life Insurance, Administrative Office, One Sammons Plaza, Sioux Falls, SD 57193. Telephone 877-872-0757.

3. Subject to the terms of the new policy

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