Converting Term Life Insurance or a New Contract

Convert if you still need lifetime coverage you can afford and your health has changed or your deadline is close; apply for a new policy if you are healthy and have time; keep your term policy if your need ends with it. A conversion privilege, where your contract has one, lets you exchange some or all of your term coverage for a permanent policy with the same insurer, generally without new health questions, up to a date the contract states. That date is the one thing here you can lose simply by waiting.

By situation. Health changed, a test result pending, or a decline elsewhere: an eligible conversion may be your route, because it does not ask about your health again; first confirm that you have a lifetime need and can afford the permanent premium. Healthy with months before the deadline: get a written conversion quote and test a new application beside it. Need ends with the mortgage or with your children's dependence: keep the term policy to its end, or renew it if you need a few more years. Not sure you have a conversion right: check the conversion provision in your contract and ask the insurer to confirm it in writing. A new application opens the market, but the insurer you apply to decides whether to cover you and at what price. Health matters, but it does not make an unsuitable permanent premium suitable.

Three facts decide the route, and they work in this order:

1. Need. Will you still need life insurance after the term ends, and how much?
2. Affordability. Could you carry a permanent premium in a bad year, not only in this one?
3. Health and time. Would a new application be accepted at a fair price, and is there time before your deadline to find out?

Go straight to your question:

• Do I need coverage after the term?
• Where is my conversion deadline?
• What can I convert?
• How do the three routes compare?
• What will permanent coverage cost?
• What happens if I keep term?

The insurer's written contract and quote, not this guide, settle your individual conversion rights and premium.

Do you still need coverage after the term ends?

Start here, because choosing a route to permanent coverage assumes you want it. Term life insurance is built for a need with an end date: a mortgage, an income your family relies on while the children are young, a business loan. Permanent coverage is built for a need that lasts as long as you do: a dependant who needs support for life, taxes and costs your estate will owe, an inheritance you intend to leave, or a business arrangement funded at death.

If your need ends with the term, the sound outcome may be to keep your term life insurance until it expires, or to renew it if your contract allows and you need a few more years. Check the renewal premiums printed in your contract before counting on renewal; they are based on your age at renewal and can be much higher than what you pay now. Letting a term policy run its course is not a failure. It means the coverage did the job it was bought for.

The strongest fair case against converting is worth hearing first. You could pay much more for lifetime coverage you do not need, recover less than you paid if you surrender in the early years, and give up flexibility to carry a premium you may later be unable to keep.

A surplus in your budget is not the same thing as a need. A surplus answers only one question: there may be room in this year's budget. It does not establish a lifetime need for coverage, whether an insurer will accept you, what the early cash values will be, or whether you could keep paying after your income falls. Write down the coverage you already have, whom it protects, when that need ends, the cash you must keep within reach, and the premium you could still pay in a bad year. Each tool does one job, and this practice, licensed for insurance only, does not compare registered plans with a policy. Before buying participating insurance, the AMF recommends checking whether cheaper insurance plus TFSA, RRSP, RESP or pension contributions would serve you better.

Note too that the owner of a policy, the person insured and the beneficiary need not be the same person. Who owns the new policy, who pays for it and who receives the death benefit are choices to confirm before anything is signed. In Quebec, designating your married or civil union spouse as beneficiary in a writing other than a will, such as the application or the policy, makes the designation irrevocable unless you stipulate otherwise (Civil Code of Québec, art. 2449). If a policy you already hold names your spouse, ask a Quebec lawyer or notary how that designation was made and what changing it would require.

What is a conversion privilege in a term life insurance contract?

A conversion privilege is a provision in a term life insurance contract that lets the owner exchange all or part of the coverage for a permanent policy from the same insurer, without new evidence of health, up to a date the contract states. That date may be expressed as an age, as a number of years from issue, or as both. After it passes, the contractual right is generally gone, whether or not you used it.

Some term contracts include this provision as a built-in feature at no separate charge; some do not, and the terms differ from one contract to the next. So do not assume either way: find the conversion provision in your contract and ask the insurer to confirm in writing that your policy is eligible. The guide to term life insurance explains what to look for when you buy coverage in the first place.

Where your contract grants the right, the insurer must apply it according to its written terms. The provision is part of the policy, governed in Quebec by the Civil Code of Québec and elsewhere by the provincial Insurance Act. The rest of this guide helps you find out what those terms allow: which products, what amounts, what premium basis.

An eligible conversion generally avoids new evidence of health for the eligible amount, because it relies on the underwriting done when your term policy was issued. Your contract and the insurer's conversion rules decide the rest: which permanent products are open, whether the premium is based on your current age or, where offered, your original age, which may require paying the premium difference for past years plus interest, and how any rating (an extra premium charged for a health or other risk) or preferred class from the original policy is treated. The rate class (the price category the insurer assigns, such as preferred or standard) belongs to the new policy, so ask for a written quote showing the product, amount, premium, rate class, any rating and the date by which you must accept it. Some insurers offer more than one conversion method; do not assume that a particular method applies to your policy. The insurer's issued documents set out the permanent coverage and its effective date, premium and table of values, and your term coverage ends, in whole or for the converted part, when it takes effect.

What should you request from your insurer?

One letter, or a phone call confirmed in writing, answers most of this decision. Ask your insurer, or have a licensed representative ask for you, for:

• Your policy schedule, the conversion provision and any amendments to the contract.
• The final date for conversion, confirmed in writing.
• The permanent products currently eligible for conversion.
• The minimum amount you can convert, whether partial conversion is allowed, and what happens to the remaining term coverage and its premium.
• The rate class or rating the converted policy would carry.
• Which riders, such as a waiver of premium, can move to the new policy, and on what conditions.
• A written premium quote for the amount you are considering.
• The guaranteed cash surrender values of the proposed policy, if any, year by year.
• When the contestable period of the converted policy (the initial period in which an insurer may have broader rights to challenge coverage for a material misrepresentation; ask when it starts for this policy) and any suicide exclusion would start.

Keep the replies with your policy. If you cannot find the contract itself, the insurer can send a copy, and the page on documents to gather before a policy review lists what else is worth having on the table. None of these requests commits you to anything.

Why does your health weigh so heavily on the choice?

Because one route asks for evidence of your health and the other generally does not. If your health has changed since the term policy was issued, a new application may come back priced above standard, postponed or declined. Then the conversion privilege may be the only practical way to permanent coverage: it works when a new application might not.

Insurability is the one input you cannot control. A new diagnosis, a test awaiting results, a new medication, a change in weight, an illness in the family since your first application: an underwriter reads each, and none can be undone. The guide to life insurance underwriting explains what an insurer looks at and why.

Health can also move the other way. If your term policy was issued with a rating and the condition behind it has since resolved or come under control, a new application may earn a better class than the one the conversion rules would give you.

Where your health is unchanged, the choice reopens on product, design and price, and it is worth putting the conversion quote and a new application quote side by side.

What limits a conversion privilege?

Your contract and the insurer's conversion rules set the limits. They decide which permanent products are open for conversion, how the premium is calculated, which riders can follow and whether any credit applies. The conversion menu may be narrower than everything the insurer sells, so ask for today's written list.

The premium is set by that insurer's rules for the permanent product, usually at your age when you convert. It is one insurer's price. That is not a flaw, but it does mean the price is compared with nothing unless you arrange the comparison. If your health would qualify for an underwritten offer, getting one is how you learn whether the conversion price holds up.

Riders do not follow automatically. A waiver of premium on disability, or another benefit on the term policy, moves only if the contract or the insurer's rules allow it, and adding a rider may require its own evidence of health. Ask as well whether any credit toward the converted policy's first premiums applies; the answer is in your contract or the insurer's rules, not in a general rule.

If building cash value is one of your purposes, ask whether an eligible product offers a rider or payment option for purchasing additional paid-up insurance (called paid-up additions), and whether declared dividends can instead be used to purchase it. These are policy features, not a deposit account; their availability and limits come from the proposed insurer's contract. Compare the guaranteed and illustrated values of each. A participating whole life policy with that rider behaves very differently from one without it, and the dividends shown in any illustration are not guaranteed.

Ask which dividend option is illustrated, whether it can be changed and what the contract says about each option. You choose a dividend option on the application, and the choice shapes how the contract grows, so ask whether and how it can be changed later. Dividends are not guaranteed, and the applicable illustration is not a promised result.

Can you convert only part of your coverage?

Often you can, subject to the rules of your contract. Partial conversion means exercising the privilege over part of the death benefit: you convert a portion to permanent coverage while the rest stays as term life insurance. Whether your contract allows it, and how, is a question for the insurer, in writing.

It lowers the new premium by converting less. That can make permanent coverage affordable where converting the full amount would not be. Before settling on a figure, confirm that the permanent amount plus the remaining term coverage still meets your need, for as long as it lasts.

Ask four questions. What is the minimum amount you can convert? What happens to the remaining term coverage and its premium? Does the remaining term coverage keep a conversion right, and until when? And is any offer to reset or renew the remaining coverage a separate offer with its own conditions? Contracts differ on each point.

What happens when the conversion window closes?

Once this conversion right expires, it generally cannot be exercised. Your term life insurance continues to the end of its term as long as you keep paying. Ask the insurer whether your contract has any separate option that remains available. Otherwise, obtaining new permanent coverage requires an application, subject to the insurer's rules and underwriting at your age and health at that time. That route may stay open, but nothing about it is guaranteed.

The window can close before the term does. A term policy can have years left to run after its conversion right has expired, so you can still hold coverage and pay the premium without the option you thought you were keeping. Conversion deadlines are often tied to an age or a policy anniversary well before the term expires, product minimums may apply, and the last conversion date is usually shown in the policy summary or contract.

Do not rely on a reminder. Ask the insurer to confirm the final date in writing and put it in your own calendar, with a second entry several months earlier. That leaves room to test a new application, which can take weeks or months, before the deadline chooses for you.

What does a new application offer that a conversion does not?

Choice. A new application lets you compare insurers, products and designs, and it prices your coverage on your current age and current health. In good health, that price may compare well with a conversion quote. The trade is underwriting: the insurer may offer standard terms, a rating, a postponement or no offer at all.

It also lets you design the contract around a purpose: the split between base coverage and paid-up additions, the years of premiums, the owner and the beneficiary. If the proposed permanent product permits additional payments for paid-up insurance, two limits can apply. The first is the insurer's own limit on those additional payments, set in the rider or the product guide. The second is the exempt policy test in section 306 of the Income Tax Regulations, which the insurer administers so the policy keeps its tax treatment. The exempt policy test is not a single extra deposit amount that applies to every policy. Section 306 has different rules for policies issued before 2017 and for policies issued from 1 January 2017, so do not assume that the tax treatment or issue date of an existing policy carries over unchanged to a proposed new contract. Ask the insurer for its product-specific payment limits and a written explanation of how it administers the exempt policy test for that policy and how a proposed payment would affect the policy's exempt status.

The process takes time. Underwriting can take weeks to months, often waiting for medical records. Keep your term policy in force and paid while the new application is assessed: it is your coverage in the meantime. A pending application is not new coverage, and a temporary insurance agreement (conditional interim coverage some insurers give under its written terms while an application is assessed; it may not last for the whole assessment), where an insurer offers one, is limited and conditional under its own written terms.

Conversion provisions generally do not make the right depend on whether you apply elsewhere, but confirm your contract has no such condition. It can end when the final date passes, when the term policy lapses or is cancelled, or in other ways your contract states.

How do the three routes compare?

The routes differ on need, health evidence, choice, price, timing and what can be lost. The table sets out the structure; your contract and the written quotes fill in the facts.

Neither permanent route is better in the abstract, and two families holding identical contracts can reasonably choose differently. Use your contract and written offers to decide whether any permanent policy is worth its premium. Need a few more years, not life? Compare your contractual term renewal premium with an application for new term coverage. A new term offer depends on underwriting; keep existing coverage until any replacement is in force.

What is the practical sequence?

Work in this order, because the deadline is the only thing here you can lose while you think it over:

1. Settle the need. Decide whether a lifetime need remains, and roughly how much coverage it calls for.
2. Find the deadline and the terms. Send the request list above to your insurer and get the replies in writing.
3. Test your insurability, if you are healthy and have time. A full application to another insurer produces a written offer; a preliminary enquiry produces only an indication.
4. Compare written figures. Put the conversion quote beside any new offer, and beside the cost of simply keeping your term coverage.
5. Report any health change. Before accepting delivery, tell the insurer in writing about any change in your health since you applied.
6. Keep your term policy in force. Do not cancel or reduce it until the new policy has been issued, delivered, accepted and paid for.

A preliminary enquiry can save time. With your written consent, and where the insurer offers it, a licensed representative can describe your medical history to an underwriter without naming you. Ask how that information is recorded and used. The reply is an indication, not an offer, and it binds neither you nor the insurer; only a full application produces a price you can sign.

Your health can also change while an application is in progress. If you have a new symptom, diagnosis, test, referral or treatment after you sign an application but before the new policy is delivered, tell the insurer in writing before you accept delivery or sign a delivery receipt, and ask how the change affects the offer. The delivery documents may ask you to confirm that nothing has changed; answer that question as carefully as the ones on the application. Do not assume that the rule about contesting an in-force policy resolves whether new coverage took effect.

Check replacement requirements before changing existing coverage. Replacing means cancelling, letting lapse or reducing an existing policy because a new one is bought. Before buying coverage that is likely to end or reduce an existing policy, ask the representative which replacement requirements apply to this transaction in your province and request the required comparison. In Quebec, a qualifying replacement has prescribed steps and a Notice: the Regulation respecting the pursuit of activities as a representative sets the procedure in sections 18 to 22, and where a proposed purchase is likely to end or reduce another contract and the replacement is in the policyholder's or insured's interests, the representative completes the Notice of Replacement of Insurance of Persons Contract no later than the application, explains the comparison it sets out, and gives you a signed copy within five working days of the application; a copy goes to your existing insurer, which may contact you to offer an alternative, and you sign the notice no later than delivery of the new policy. Ontario uses a Life Insurance Replacement Declaration for a qualifying replacement, which the Financial Services Regulatory Authority of Ontario publishes; if you live elsewhere, ask the representative which form your province uses. A conversion under your own contract with the same insurer is usually an amendment, not a replacement; ask your insurer in writing how it classifies yours. These forms make the trade-offs visible before anything is cancelled, and what a policy replacement is in Canada explains the process.

Give yourself calendar room. Starting a few weeks before the deadline can force the decision by default: the route with a date on it closes before the other finishes.

What will the permanent policy cost, and can you carry it?

Permanent coverage costs materially more than term life insurance for the same death benefit; converting does not change that. Term life insurance prices a set period of risk, with nothing building up. Permanent coverage may last for life while the policy remains in force, but premiums, cash values and guarantees differ by product (what a premium is made of). Some whole life contracts specify guaranteed minimum cash values; do not assume a universal life proposal or every permanent contract has the same schedule. Ask for the proposed contract's guaranteed amounts, if any, separately from illustrated amounts. The premium deserves a real test.

Illustrative example. Suppose, as an assumption only, that a written conversion quote shows a permanent premium of $4,800 a year, and that in an ordinary year your family has $18,000 left after all expenses and savings. The premium would take about 27% of that surplus ($4,800 ÷ $18,000). In a bad year, a contract ends or an unplanned repair arrives, and the surplus falls to $7,000. The same premium would then take about 69% of it ($4,800 ÷ $7,000). These figures are invented to show the arithmetic, not an insurer's rates. Run the same two divisions with your own quote and numbers.

If the premium fails that test, convert a smaller amount, or keep your term life insurance and revisit the question before the deadline. A policy funded from optimism rather than from cash flow tends to lapse, and a lapse early in a permanent policy's life is expensive.

Here is why. Permanent policies usually build cash value (Financial Consumer Agency of Canada), but a proposed policy's early surrender payment may be less than the total premiums you paid. Check its dated, year-by-year guaranteed and illustrated values, and compare each year's guaranteed cash surrender value with the total premiums paid by that year, before you commit. A surrender can also create taxable income when the proceeds exceed the policy's adjusted cost basis (a tax figure set by the Income Tax Act, not simply the premiums you have paid, which the insurer tracks for the policy) (Income Tax Act, s. 148(1), with the definitions in s. 148(9)). The guide to cash surrender value shows how that value is read.

What a surrender pays, and what may be taxable. Start with the insurer's contractual cash surrender value. Account separately for any applicable surrender charge and any policy loan, with its interest, to determine the cash you would actually receive. Do not calculate a taxable policy gain by simply subtracting the adjusted cost basis from that cash payment: the Income Tax Act compares the statutory proceeds of a policy disposition with the policy's adjusted cost basis, and the cash paid to you is not necessarily the amount used to calculate that gain.

• Cash you receive: the amount payable after contractual deductions and any outstanding policy loan and interest.
• Taxable policy gain, if any: determined separately using the Income Tax Act's proceeds of disposition and adjusted cost basis rules (s. 148(1) and 148(9)), not simply from the cash paid to you.

Before surrendering, request the insurer's written cash value, loan balance, adjusted cost basis and estimated taxable policy gain, and have an accountant review the proposed transaction.

Affording a premium is not the same as being able to recover it. Ask what choices the contract gives you if you cannot continue paying, and do not count an illustrated value or an unapproved loan as cash available for an emergency.

If access to cash value is part of your reason for choosing permanent coverage, distinguish an insurer policy loan from a loan made by another lender with the policy pledged as security. The lender that advances the money receives the interest. A policy loan is an advance from the insurer, secured by the cash value: the insurer sets the loan rate, can change it as the contract allows, and receives the interest. Unpaid loans and interest reduce the death benefit and the cash value, and under the contract's terms the policy can lapse if the debt grows larger than the cash value. A heavily borrowed policy that lapses may also produce a taxable gain with no cash received; ask the insurer for the loan balance and adjusted cost basis first. Availability, rate, repayment requirements and effects on the death benefit or on surrender depend on the policy or loan agreement. A policy loan is a disposition for tax purposes, taxable to the extent it exceeds the adjusted cost basis (Income Tax Act, s. 148(9) and s. 148(1)); pledging a policy as security for a loan from another lender is not itself a policy disposition under the federal definition. Obtain written terms, ask for the basis of the policy loan rate with the other figures below, and ask an accountant about your proposed transaction.

Reader worksheet. Fill in each blank from the insurer's written quote, not from anyone's estimate; it is not a comparison of prices. Ask the insurer whether the proposed change exercises a provision of your existing contract or involves a separate transaction, and request its written account of any policy disposition, adjusted cost basis and applicable exempt policy issue date, including which version of the exempt test the new policy is measured under. Have an accountant assess the tax effect on your facts before proceeding. If a corporation will own the policy, ask its accountant how the conversion affects the policy's adjusted cost basis and the corporation's capital dividend account. If either proposal is participating whole life, ask for guaranteed, current-scale and insurer-produced reduced-scale values on the same funding assumptions. Then decide in order: drop any route that misses the need or whose premium would not survive a bad year; keep an eligible conversion deadline alive while another application is pending; and compare written offers on the same basis, guaranteed values first.

Who supplies the blanks: your existing insurer supplies the conversion terms and existing schedule; any prospective insurer supplies its written offer, proposed contract and illustration. A licensed insurance representative can obtain and compare them. Do not choose by the illustrated column alone; illustrated values are not guaranteed.

What goes wrong on either route?

Each route has its own ways of going wrong. With a conversion, the privilege may not exist, because nobody checked. The menu may not hold a design that fits, and a converted policy without a paid-up additions rider will not behave the way someone reading about cash value design expects. A healthy person can accept one insurer's price without comparing it. And the deadline can pass quietly, because it needs no decision by anyone.

With a new application, underwriting asks a lot: your medical history, possibly blood and urine tests, your consent to release records from your physician, and sometimes your income, net worth and the source of the premium. It can come back rated, postponed or declined. Later applications usually ask whether you have been declined, postponed or rated, and you must answer truthfully. Some people also learn something about their health along the way, which they must then disclose.

Answer every question on an application fully and accurately. During a policy's first two years in force, the insurer may be able to annul or reduce the contract for a material misrepresentation even if it was innocent, with consequences set by your province's rules; after two years it generally has to show fraud (in Quebec, Civil Code of Québec, art. 2424; elsewhere, the provincial Insurance Act sets the rule). That two-year limit runs while the policy is in force during the insured person's lifetime, and it concerns what was said or left out on the application. A separately underwritten new policy has its own two-year period, while the term policy you hold may already be past its own. In Quebec, a suicide exclusion cannot apply after two years of uninterrupted insurance (Civil Code art. 2441). Ask the insurer in writing when a converted policy's periods would start, obtain legal advice if the dates matter to a claim, and read the guide to misrepresentation on an application for the rest.

On both routes, the permanent premium is materially higher than the term premium, and a decision left to the last months before a deadline gives neither route room to be done well. The arguments against permanent coverage, including the ones that are right, are set out in the real costs.

Who each route suits, and who should convert nothing

Conversion suits you if you still need lifetime coverage you can afford and your health has changed since the term policy was issued. It suits you if a test or investigation is still open, or if you have been rated or declined elsewhere. It also suits you when the deadline is too close to underwrite a new application. And it suits converting an affordable portion rather than the whole amount.

Conversion suits you less if you are healthy, have time before the deadline and have not obtained a competing offer, because the conversion price has then been compared with nothing. It does not suit a purpose that needs a design the insurer will not issue on conversion, nor a person rated at issue for a condition that has since resolved.

A new application suits you if you are in ordinary health and can wait weeks or months. It suits a contract designed around a specific purpose, one you intend to fund above the base premium, and a price you want tested against more than one insurer. It suits you less if your insurability is in real doubt while the deadline is close. An application may not produce an offer before your conversion deadline, and later applications usually ask whether you have been declined; ask about the expected process, but preserve time to exercise your contractual option if you need it, so a pending application does not use up the conversion window. It also suits you less if you are in the middle of medical tests that have not yet produced a result. A new term application suits a need that outlasts your current term but not your life.

And some people should convert nothing. Your need may end with the mortgage or with your children's dependence. The permanent premium may crowd out costly debt repayment or a cash reserve. You may need the money back within a few years. In each case, keeping your term life insurance to its end is a reasonable choice. Test the case against converting, set out near the start, with written figures rather than guesses. Fill in the request table under the cost section for each route: if the coverage amount is more than a lifetime need calls for, if the guaranteed surrender values in the early years sit well below the premiums paid, or if the premium would strain a bad year, the case against wins and keeping the term policy is the sounder choice.

What the choice comes down to

Conversion buys permanent coverage without being underwritten again, at that insurer's price, from that insurer's list. A new application buys a choice of insurers and a contract built for a purpose, at the price your current health earns, with the risk that it earns no offer. Keeping your term life insurance buys protection for the years you need it, usually at the lowest premium of the three, and nothing after.

First decide whether a lifetime need remains and what premium you can carry in a bad year. If it does, your health, deadline, eligible products and written prices decide the route. A meeting with a licensed representative of Canadian Wealth Creation Centre Inc. can cover a conversion decision on a policy you already hold: the dates, the amounts and what to request in writing.

Everything here is written by someone paid by commission from an insurer when a policy is issued, as stated on the author page. This guide is general information about Canadian life insurance, not advice on your own contract; your issued policy and the insurer's written confirmations govern.