Can you convert term life insurance to permanent life insurance?
Yes, you can, if your policy has an option to convert and it’s within the conversion period that’s in your contract..
Why convert a term life insurance policy to a permanent life insurance policy?
There may be many reasons why you’d want to convert your term policy to a permanent policy.
Most often, it would be because your needs have changed since you took out your term life insurance policy. Maybe you initially took out your term policy to cover your mortgage. But a few years later, when your term policy is coming to the end of the initial term period, you have a family and other reasons for life insurance coverage.
Permanent life insurance is guaranteed lifelong coverage (as long as you make your premium payments) that protects the people you care about. But it’s more than just insurance. Over time your policy can build value you can access for cash during your life, with certain tax implications.
You can access money in your policy through a loan or a withdrawal. And when you die, the people you’ve chosen receive a tax-free payment. If you do access money in your policy through a loan or a withdrawal, the payout when you die may be reduced.
Other situations where you may consider converting term life insurance to permanent life insurance include if you have:
- A lifelong dependent – You have a child with special needs or parent who depends on you financially and permanent life insurance can provide proceeds to help ensure they’ll be taken care of.
- Health concerns – If your health changes while you have a term policy, you may be able to convert to a permanent policy with the same risk rating.
- Estate planning – Permanent life insurance can be an ideal estate planning tool, helping pay for funeral expenses, taxes and probate fees (excluding Quebec) after you die.
Don’t need the option to convert? Looking for straightforward term life insurance that’s easy to apply for, with no medical tests? Get a quote for Canada Life My Simple Term™ life insurance.
What’s the process to convert a term insurance policy to a permanent life insurance policy?
Here are the steps to convert your term life insurance coverage:
- Talk to your advisor to see what coverage will work best for you and how to get started on converting your policy.
- Check your term life insurance policy to determine whether it’s convertible and if so, when it’s convertible. There may be a time period after which your term life insurance policy can no longer be converted.
- Determine the amount of permanent life insurance coverage you need. Because permanent life insurance premium payments are usually more expensive than term life insurance, you may want to do this with the help of your advisor.
- Work with your advisor to decide which type of permanent life insurance you want: participating life insurance or universal life insurance.
- Choose whether you wish to add any additional benefits, sometimes called “riders”, to your policy.
- Meet with your advisor to complete the conversion application.
The differences between universal and participating life insurance
Universal and participating life insurance share these features:
- You get lifetime insurance coverage.
- You can choose from single-life and joint-life options.
- The policy is guaranteed to pay out when the insured person dies, as long as the required payments are made.
However, each has unique features.
Participating life insurance
- Your cash value is guaranteed to grow inside your policy.
- It's a stable low-risk asset for your portfolio.
- You may recweive a policyowner dividend.
Universal life insurance
- You can manage your risk and choose investment accounts.
- Your policy could be more affordable than other permanent plans[KR1] [JG2] .
- Your scheduled premium payments are flexible[KR1] [JG2] .
Term life insurance conversion with reset feature
Canada Life’s term conversion with reset feature allows an eligible amount of term life insurance coverage to be converted to a term insurance benefit on a new permanent life insurance policy.
The new term benefit will be based on the same age as the new permanent policy at new issue rates without underwriting. At least 40% of the converted term coverage must be a permanent base policy.
Here are 2 examples of how this works.
Example 1: How the new term reset works when full conversion is chosen.
- At age 45, Michelle buys a Canada Life My Term™ policy with a 10-year term length.
- At age 54, Michelle converts it to a new par or universal life insurance policy with a Canada Life converted term benefit – 10 years.
- Both the new policy and the converted term benefit get rates based on Michelle’s age 54.
- As part of the conversion, the renewal date of the term insurance portion of her policy will “reset” . The first renewal of the converted term benefit is at age 64. This is instead of at age 55, when it would have renewed under the original term policy.
Example 2: How the new term reset works when partial conversion is chosen.
- At age 42, Ajay buys a $1 million Canada Life My Term policy with a 10-year term length.
- At age 51, Ajay decides to exercise a partial term conversion with reset. Because he converts $500,000, at least $200,000 (40%) must be applied to the new policy’s base coverage. He could choose a higher amount of permanent coverage if desired.
- Ajay converts $500,000 of the original term policy to a new policy with $200,000 permanent base coverage and a $300,000 converted term benefit.
- The converted term benefit must have a term length at least as long as the term length of the original policy. In this case, the term length can be 10, 20 or 30 years.
- Ajay can maintain the remaining $500,000 coverage on the original term policy. He may decide to convert that coverage later. Or he can cancel the remaining coverage at the time of conversion.
The above examples are for illustrative purposes only. Situations will vary according to specific circumstances.