Can you convert term life insurance to permanent life insurance?
Yes you can, provided your policy is within the conversion period, as set out 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 premiums are paid) 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 tax-free payment 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.
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 period of time 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.
- Decide the 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.
- Complete the conversion application, including selecting the premium payment frequency, designating beneficiaries and any other requirements. Sign and submit your application.
The differences between universal and participating life insurance
Universal and participating life insurance share these features:
- Lifetime insurance coverage
- Guaranteed premium payment options
- Guaranteed payout
However, each has unique features.
Participating life insurance
- Your cash value is guaranteed to grow inside your policy
- A stable low-risk asset for your portfolio
- May provide you with a policyowner dividend
Universal life insurance
- Manage your risk and choose investment accounts
- Build your wealth
- Payment flexibility
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 rider on a new permanent life insurance policy.
The new term rider 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.
- John bought a $1 million Canada Life My Term™ policy with a 10-year term length at age 45.
- Now at age 54, John decides to exercise a full conversion with term reset to a permanent policy with 10-year term rider. Because John is converting $1 million, at least $400,000 must be applied to a new permanent base policy (40% of total converted coverage).
- John receives the rates for his new permanent policy with the term rider based on age 54, all without underwriting.
- John’s first term rider renewal will be deferred to age 64. This is instead of age 55, when it would have renewed under the originally purchased term policy.
Example 2: How the new term reset works when partial conversion is chosen.
- John bought a $1 million Canada Life My Term policy with a 10-year term length at age 45.
- Now at age 54, John decides to exercise a partial conversion ($500,000 of his $1 million policy) with term reset to a permanent policy with a term rider. Since John is converting $500,000, at least $200,000 must be applied to a new permanent base policy 40% of $500,000 is $200,000 and John could choose a higher amount of permanent coverage if desired).
- John converts $500,000 of the original policy to include $200,000 of permanent coverage, and $300,000 as a new rider that’s either the same length or greater than the original policy. In this case 10, 20 or 30 years.
- John can either choose to maintain the remaining $500,000 on the original term policy and convert at later date or choose to cancel.
The above examples are for illustrative purposes only. Situations will vary according to specific circumstances.