A Conversation on Life Insurance Conversions

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Most people think of life insurance as the most morbid of financial vehicles.  After all, it only works when you’re dead, right?  Not so fast.  There has been significant evolution since 100 B.C. when Caius Marius of Rome created perhaps the first unofficial life insurance company via a burial club to help pay for funeral expenses in his community1.  Now, just a few thousand years later, there is over $19.6 trillion of coverage in force, with over $290 billion of benefits having been paid out in 20182.  Furthermore, there are almost 800 life insurance carriers in America alone3, offering countless variations of the product.  There may be more reasons why it is called life insurance, instead of death insurance.  

Term Life Insurance, or at least the way it works, is what many consumers first think of when they hear life insurance.  As the name suggests, it is coverage for a specified term of time, often 10, 20, or 30 years.  It is meant to provide a temporary death benefit at an affordable cost.  Sounds like a good value, right?  However, according to statistics, a 30 year-old male in good health has a 99% chance of living past age 504.  In other words, 99% of the time this type of individual will pay premiums every month for a 20-Year Term Life policy and realize a 0% return, not counting any conceivable lost opportunity costs on spent premiums.  As one can interpret, this is more like “use it or lose it” death insurance.

The other side of the term argument recognizes that it is likely the most efficient and effective decision ever made by the 1% who unfortunately do pass away within the policy’s term.  It is also difficult to place a numeric value on the peace of mind the other 99% may realize from knowing their loved ones are cared for should the unexpected occur.  So, with cost only being an objection in the absence of value, is there enough value in term life insurance to warrant its low cost?  Apparently so, as 71% of life insurance policy owners own term life insurance5.

Permanent Life Insurance greatly expands upon the uses traditionally associated with life insurance, but usually at a higher cost than term life.  Again, as the name alludes to, it is meant to provide a permanent death benefit6.  These type of policies typically combine the death benefit with a cash value that can be accessed while living7.  This dynamic offers up what policy owners consider both a “family value” and a “my value”.  Permanent insurance can largely be boiled down into Whole Life and Universal Life.  Whole Life can grow through dividends whereas Universal Life relies upon credited interest8.  It is worth noting that Universal Life can potentially lapse if there is inadequate funding due to low interest or increased insurance costs9.

If the main point of life insurance is to provide a tax-free benefit to heirs upon death, consumers should recognize term life will likely expire before that event occurs.  Permanent, so long as premiums continue to be paid accordingly, can provide that certainty.  Possessing certainty within a financial plan can free beneficiaries of having to liquidate other forms of savings or investments that the death benefit might otherwise cover, and in advance, gives the policy owner a permission slip to use assets differently while alive.

The associated cash value could potentially fund retirement, education, gifts to family, donations to charity, while satisfying some “emergency fund” liquidity goals.  Not only that, but cash value can have the ability to grow tax-deferred and be accessed in a tax-advantaged manner later in life10.  As the conversation of cost versus value continues, life insurance shoppers might consider permanent insurance to actually be less costly over time.

No one every knows what the future holds, so it can be a great option for millennials purchasing term life insurance to throw on a conversion option to their policy.  These riders can allow the policy owner to convert some or all of their term policy into a permanent product at a later date with no further medical underwriting.  This can be an affordable way to leave the door open as goals and concerns change, or as affordability becomes less of an issue based on household income.

If you’re looking to add to the over 28 million life insurance policies purchased annually11, do review your entire financial plan before buying a policy.  If you fall within the 58% of millennials who sited not knowing which product or how much to buy as the reason for not owning life insurance12, consider a Certified Financial Planner to assist in your journey.  

Bryan M. Kuderna, CFP®, MSFS, RICP®, LUTCF is the host of The Kuderna Podcast and founder of Kuderna Financial Team, a NJ-based financial services firm. He is also the author of ANOROC and Millennial Millionaire.


  1. https://www.thinkadvisor.com/2013/09/09/a-brief-history-of-life-insurance/
  2. https://www.trustage.com/learn/inside-insurance/does-life-insurance-pay-out
  3. https://www.statista.com/statistics/194335/total-number-of-life-insurance-companies-in-the-us/#:~:text=The%20statistic%20presents%20the%20total,were%20773%20U.S.%20life%20insurers.
  4.  2015 VBT Preferred Class Structure Mortality Table on 30 year-old male in good health.
  5. https://www.bestliferates.org/life-insurance-statistics/
  6. All whole life insurance policy guarantees are subject to the timely payment of all required premiums and the claims paying ability of the issuing insurance company. Policy loans and withdrawals affect the guarantees by reducing the policy’s death benefit and cash values.
  7.  Some whole life polices do not have cash values in the first two years of the policy and don’t pay a dividend until the policy’s third year. Talk to your financial representative and refer to your individual whole life policy illustration for more information.
  8. Permanent life insurance consists of two types: whole life and universal life. Cash value grows in a participating whole life policy through dividends, which are declared annually by the company’s board of directors and are not guaranteed. Cash value grows in a universal life policy through credited interest and decreased insurance costs. The cash value of both policy types benefits when the policyholder pays an amount above the required premium.
  9. Universal Life Insurance may lapse prematurely due to inadequate funding (low or no premium), increase in cost of insurance rates as the insured grows older, and a low interest crediting rate. This does not apply to universal life policies which have a secondary guarantee, but if the secondary guarantee requirements are not met the policy will most likely lapse.
  10.  9Policy benefits are reduced by any outstanding loan or loan interest and/or withdrawals. Dividends, if any, are affected by policy loans and loan interest. Withdrawals above the cost basis may result in taxable ordinary income. If the policy lapses, or is surrendered, any outstanding loans considered gain in the policy may be subject to ordinary income taxes. If the policy is a Modified Endowment Contract (MEC), loans are treated like withdrawals, but as gain first, subject to ordinary income taxes. If the policy owner is under 59 ½, any taxable withdrawal may also be subject to a 10% federal tax penalty.
  11. https://www.policygenius.com/life-insurance/life-insurance-statistics/
  12. https://www.bestliferates.org/life-insurance-statistics/
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