Partial or full term conversion: splitting the face amount

Most people think of a term conversion as a switch with two positions: stay in term or move to permanent. In practice most conversion rights are a dial. If your contract allows it, you can convert a slice of the face amount, keep the rest as term and decide again later, as long as the window is open. The real question is how much to convert, and that has an answer you can work out from what you need to last, what you can afford to keep paying and what your term policy does to the part you leave.

The mechanics of the right itself are in the converting term life to permanent: how the conversion option works guide. This post is for the person who has the right and is deciding the size of the slice. The numbers are illustrations with round figures, not prices; your insurer's illustration will show the real ones.

The situation

Say Taylor, 52, bought a $600,000 level term insurance policy twelve years ago with a 20-year term and a conversion privilege that lasts until the end of year 15. That leaves three years in the window and eight years of coverage. Taylor's spouse, Jordan, 49, works. Their daughter has finished college and the mortgage will be paid off at 62. Taylor's health is fine but no longer perfect: a blood pressure medication and a cholesterol medication, enough that a brand-new policy would no longer be at the best price.

Taylor asks a practical question. The term policy will end at 60. Some needs will end with it; others won't. Should the family convert all $600,000, none of it, or some of it?

What the terms usually say about a partial conversion

A partial conversion works only if the contract or the insurer's rules allow it. The questions to put to the insurer in writing:

• Is partial conversion allowed, and what is the minimum amount? Insurers often set a minimum face amount for the new permanent policy, and sometimes a minimum premium.
• What happens to the term policy? The usual design reduces the term face amount by the amount converted and reduces the term premium in step. Some insurers do something different, so ask whether the remaining term keeps its original end date, its original rate class and its own conversion right for the rest of the window.
• Which products can I convert into? The list is set by the insurer and may include a whole life policy, a guaranteed universal life policy or neither. The choice decides the price. The guaranteed universal life: permanent coverage without the cash guide explains the cheaper design, which gives lifelong coverage with little cash value.
• What rate class applies? Usually the class on the original policy, but check. Conversion generally skips evidence of insurability, so Taylor's blood pressure does not matter here, but the new premium follows attained age, meaning Taylor's age on the conversion date.
• Do the incontestability and suicide clocks restart on the new policy? Practice varies, and the answer belongs in the offer.
• Can I convert more later? If the window is still open after the first slice, can the rest be converted? This matters for staging.

Sort the need into two buckets

The first step is to separate what ends from what does not.

Needs that end. Taylor's daughter is independent, so no education cost remains. The mortgage ends at 62, two years after the term ends, and the remaining balance by then will be modest. Jordan has retirement savings and will qualify for Social Security. These needs fade, and the term policy covers them for the years it still runs.

Needs that do not. Two remain. First, final expenses for Taylor, which are due whenever Taylor dies, not only before 60. Second, Taylor's pension has no survivor benefit, so Jordan would lose a portion of household income for life if Taylor dies first. Say the family estimates that a lump sum of $150,000 would fill that gap and pay final costs. That estimate is theirs; in your case it will differ.

So the lasting need is $150,000. The term-length need, which is larger, runs for eight more years. The partial conversion is built from that arithmetic: convert about what is lasting, keep the rest as term while it lasts.

The options side by side

For the illustration, say the term premium is $60 a month for $600,000, which is $10 a month per $100,000. Say a guaranteed universal life conversion at Taylor's current age costs an illustrative $300 a month per $100,000. These are made-up round numbers, chosen to show proportions, not quotes.

Check one row. In option C, 1.5 units of $100,000 at $300 is $450; the remaining term of $450,000 is 4.5 units at $10, or $45; the monthly total is $495 and the yearly total is $495 x 12 = $5,940. In option E, six units at $300 is $1,800 a month, or $21,600 a year.

A few observations follow from the table.

• The conversion slice drives the price. Each $100,000 converted adds about $290 a month in this illustration ($300 for permanent minus the $10 the term piece no longer costs). Converting the whole policy multiplies the premium thirty-fold from the original $60.
• Death benefit changes over time. Under option C, the family has $600,000 until Taylor is 60 ($150,000 permanent plus $450,000 term), and $150,000 afterward. Under option E, the family has $600,000 for life.
• Option A has the lowest cost and a cliff. At 60 the coverage is gone. Taylor would then have to buy new coverage at a much older age or go without.

Criteria for choosing the slice

The lasting need sets the floor

Convert at least the amount that must exist whenever Taylor dies. If the lasting need is $150,000, converting less leaves a hole at 60; converting more is a decision to prepay for need that the term already covers.

The budget sets the ceiling

A permanent policy is a commitment for life. Premiums may be level, but they are not optional: if the policy lapses at 75 after twenty years of premiums on a no-cash-value design, the family has nothing. Taylor should convert only an amount that the household would keep paying through retirement, when income falls. If $495 a month is comfortable now but would strain a retirement budget, option B is more honest.

Health and alternatives set the value of the right

If Taylor could still buy a new term or permanent policy at a competitive price, the conversion may be unnecessary. The right to skip underwriting is worth more when health has declined. Taylor's two medications may move the rate class but not rule out coverage, so getting a competing quote for $150,000 of permanent coverage is a reasonable test before using the right. The what happens when your term life policy expires guide lays out the other roads from a term policy that is ending.

The deadline sets the schedule

Taylor has three years of window. Waiting costs money because the conversion premium follows attained age. Waiting also keeps flexibility, because a change in plans or health can be handled while the right is still open. The window is the real limit; the date in the contract is the one that counts.

The product decides the price per dollar

Whole life builds cash value and costs more per dollar of death benefit. Guaranteed universal life costs less and builds little or none. Neither is better in the abstract; the lasting need here is a death benefit, so the cheaper design is often the one families use. The cash value policies in the term vs permanent life insurance: the core trade-off guide are a different discussion with different goals.

Converting in stages

Taylor can also split the conversion over time. Say Taylor converts $100,000 now and $50,000 at 55. If the permanent premium rises with age, the later slice costs more per dollar. In the illustration, suppose it costs $360 per $100,000 at 55.

• $100,000 at 52: $300 a month.
• $50,000 at 55: half of $360, or $180 a month.
• Combined monthly premium for $150,000 converted in two steps: $300 + $180 = $480.

Compare that with converting all $150,000 at 52 for $450 a month. Staging costs $30 more a month in this illustration, which is the price of waiting. What it buys is information. If Taylor's health stays stable and the pension picture clears up, the second slice may be unnecessary. If the plans change, the second slice is available, provided the window is still open.

Staging only works if the contract allows it, and it carries a risk: a deadline missed or an insurer that treats the first conversion as the only one. Ask in writing.

What happens to the term piece

Several details decide how well the remaining term behaves.

• Premium on the remainder. In most designs the premium falls in proportion to the reduction in face amount. Verify it in the offer, not in conversation.
• End date. The remaining term usually ends on the original date. Converting does not extend it.
• Riders. A waiver of premium rider or other add-ons may stay with the term piece, move to the new policy or end. If Taylor values one, ask.
• Ownership and beneficiaries. The new policy needs its own beneficiary designation, and Taylor should confirm that ownership matches the old policy. Mismatched designations are a common source of confusion at claim time.
• Tax. A conversion is generally not a taxable event, and death benefits to a named beneficiary are generally income-tax-free. Cash value, if any, grows tax-deferred. A tax professional can address a particular situation.

For a sequence of choices before the window closes, see the conversion window on a term policy, year by year, and for errors to avoid in the paperwork, mistakes people make when converting term to permanent.

What the family holds at each age

It helps to see the death benefit over time, not only the premium. Using the same illustration, here is what Taylor's family would hold under three of the options.

The extra cost of option C over option A is $495 - $60 = $435 a month, or $5,220 a year. Over the eight years the term still runs, that is $5,220 x 8 = $41,760 in extra premium, and in return the family holds $150,000 of coverage that continues after 60. Whether that is a good deal depends on what happens at 60 and beyond: if Taylor would likely be able to buy a policy then at a similar price, the conversion pays more than it needs to; if Taylor would likely be uninsurable or the price would be far higher, it pays off. Nobody knows which, which is why the decision turns on risk tolerance as much as arithmetic.

Notice also what option E does to the budget. At $21,600 a year, option E costs $21,600 - $720 = $20,880 more than option A each year. Over eight years that is $167,040 in extra premium. For a family that needs only $150,000 to last, that is far more than the lasting need would cost; option E makes sense mainly for someone whose entire $600,000 need is permanent, such as a parent providing for an adult child with a disability.

Steps for the next 90 days

1. Pull the policy and the conversion rider. Highlight the deadline, the eligible products and any minimum amounts.
2. Request written illustrations for at least two slices, for example $100,000 and $150,000, in each eligible product. Ask for guaranteed premiums, not only projected ones.
3. Ask the insurer how the term piece changes after a partial conversion: premium, end date, riders and remaining conversion rights.
4. Get a competing quote for the lasting amount from another insurer, so you know what the right is worth to you.
5. Run the retirement test. Write the permanent premium into a retirement budget and ask whether it still fits at lower income.
6. Discuss the beneficiary and ownership setup with the family and, where a trust or a divorce decree is involved, with an attorney.
7. Submit the conversion in writing before the deadline, keep proof of the date and do not let the term policy lapse before the new policy is issued.

A decision list

• If your lasting need is smaller than your term amount and your budget is tight, then convert only the lasting need, in the cheapest product the insurer offers.
• If your health has declined and you still need coverage after the term ends, then convert at least the lasting need while the window is open, because the right ignores health.
• If your health is good and competing quotes are cheaper, then compare before using the right, and keep the conversion as a fallback.
• If the permanent premium would be a strain in retirement, then convert less, or choose a design with level guaranteed premiums and check the lapse protections.
• If nobody would depend on your income after the term ends, then consider letting the term expire without converting.
• If the window closes within a year, then decide now: ask for illustrations at two or three amounts, and file the paperwork before the term or the window ends.
• If you cannot tell how much of the need is lasting, then ask a fee-only planner to test it.

Key takeaways

• A partial conversion lets you cover the lasting need with permanent coverage and leave the rest as cheaper term, but only if your contract allows it, so confirm the minimums and the effect on the remaining term.
• Size the slice by the need that outlives the term, then check it against what you could keep paying in retirement.
• In the illustration, each $100,000 converted added about $290 a month, and converting everything multiplied the premium thirty-fold.
• Staging the conversion preserves flexibility at the price of a higher attained-age premium on later slices.
• Get every answer about the remaining term, riders and deadlines in writing, and file before the window closes.