August 6, 2026
4:29 pm

Converting Term to Permanent Before a Life Settlement

Do not convert first and then go looking for a buyer. Get the policy reviewed while it is still term, find out whether an offer exists and roughly what it looks like, and convert only once there is a reason to — because conversion starts a permanent premium bill that is yours to pay from that moment forward. The order of operations is the whole ballgame here, and getting it backwards is how people end up paying for permanent coverage they did not want on a policy that turned out to have no market value.

The mechanics are simple to state. A pure term policy is a promise to pay if you die inside a defined window. It accumulates no cash value, and it expires. A secondary-market buyer is purchasing the certainty that the policy will eventually pay a death benefit, so a term policy with a hard expiry date is worth nothing to them. A conversion rider changes that: it is a contractual right to exchange the term policy for permanent coverage from the same carrier, without new medical underwriting. Exercise it and you are holding an asset that will exist whenever the insured dies. That is what makes a sale possible.

The deadline is the conversion expiration, and it is not the end of the term. It is usually the earlier of a stated policy year or a stated attained age, both spelled out in the rider. Once it passes, essentially nothing on this page applies anymore.

In This Article

Find Your Actual Conversion Deadline, in Writing
Why the Sequence Matters So Much
Which Permanent Product to Convert Into
Ranking Every Option, Not Just This One
When Converting to Sell Is the Wrong Move
What the Numbers Tend to Look Like
A Working Timeline and What to Send
Frequently Asked Questions

Converting Term to Permanent Before a Life Settlement

Find Your Actual Conversion Deadline, in Writing

Call the carrier’s policyholder service line and ask four questions. What is the last date on which this policy may be converted? What permanent products is it convertible into today? Is partial conversion permitted, and is there a minimum face amount? Are there any conversion credits that reduce the first-year permanent premium? Ask for the answers in writing or by secure message, and keep them.

Two of those questions surprise people. First, many large term writers do not let you convert into their full retail portfolio. They restrict conversion to a designated conversion chassis — often a universal life product priced specifically for that purpose — and the available list changes over time as carriers reprice. What your agent told you in 2009 about “any of our permanent products” may simply no longer be true. Second, conversion credits exist at some carriers and not others; where they exist they typically offset part of the first-year permanent premium and are worth real money.

Do not rely on the illustration you were given at issue. Do not rely on an agent’s recollection, and be aware that the agent who sold the policy may no longer be appointed with the carrier at all. The carrier’s own record is the only source that counts. Our page on a term conversion rider that is expiring covers what to do when that date is close.

Why the Sequence Matters So Much

Here is the risk in converting first. Conversion creates a permanent policy with a permanent premium, typically many times the level term premium. If you convert a $500,000 term policy at age 74 and the permanent premium is $22,000 a year, you now owe $22,000 a year. If the review then comes back with no offers — because the insured is healthier than expected, because the face amount is modest, or because the cost of insurance on the converted contract makes the policy expensive for a buyer to carry — you are holding an obligation you created for a transaction that never happened.

The disciplined sequence is: review the term policy as it stands, including the rider schedule and the carrier’s conversion product list; get an indicative view of whether a market exists and roughly at what level; then, if it does, convert into the specific product that produces the best economics for a buyer, and move to closing quickly so the number of permanent premiums you personally pay is small.

In many completed transactions the conversion happens close to closing and the buyer’s first premium payment falls due shortly after the change of ownership records. That is the outcome to aim for. It is not guaranteed, and any provider promising it in advance is overpromising — but structuring toward it is normal practice.

Which Permanent Product to Convert Into

If the plan is to keep the coverage, you want the product that best fits your own need. If the plan is a sale, you want the product that minimizes the cost of keeping the policy in force to maturity, because that carrying cost is subtracted from what a buyer will pay.

In broad strokes: a guaranteed universal life contract, which trades away cash value accumulation for a contractual no-lapse guarantee at a low, level premium, is usually the most attractive chassis for a secondary-market buyer, because the buyer’s future obligation is knowable. A current-assumption universal life contract has a moving cost of insurance and therefore an uncertain carrying cost. A whole life conversion carries a high premium but builds cash value. An indexed universal life conversion introduces cap, participation-rate, and floor mechanics that make a buyer’s projections messier. None of this is a rule — carriers price differently and some make only one option available — but it is the axis on which the decision turns.

Partial conversion deserves specific attention. Many carriers permit converting a portion of the face amount and letting the remainder run out. That opens a middle path: convert $250,000 of a $750,000 term policy, keep a manageable permanent premium, and drop the rest. Ask whether the carrier allows it and what the minimum conversion face amount is.

Path	What you pay	What you get	Best when
Let the term expire	Nothing	Nothing	No conversion right, nobody depends on it
Annually renewable premium	Rises steeply each year	Coverage continues year to year	Short bridge, poor health, survivor needs it
Convert full face and keep	Full permanent premium	Permanent coverage, no exam	Coverage still needed and affordable
Partial conversion and keep	Reduced permanent premium	Smaller permanent policy	Need shrank but did not vanish
Accelerated death benefit	Nothing (rider already paid for)	Tax-favored payment under IRC 101(g)	Certified terminal illness
Convert, then sell	Permanent premiums until closing	Lump sum; GAO-10-775 range 10-35% of face	Window open, $100,000+ face, impaired health

Ranking Every Option, Not Just This One

Do nothing and let the term expire. Costs nothing, produces nothing. Correct when no one depends on the death benefit, the policy cannot be converted, and the renewal premium would come out of money you need.

Pay the annually renewable premium after the level period. Most level term contracts continue past the level period at rates recalculated each year on attained age, up to a contractual final expiry age. Rational only as a short bridge. See what the renewal premium actually looks like.

Convert and keep. The right answer when the coverage is still needed — a surviving spouse, a special-needs child, estate liquidity, a business obligation — and the permanent premium fits the budget. No exam, contractual right, and it solves a real problem.

Partial conversion and keep. Smaller permanent policy, smaller premium, some protection preserved. Frequently the best answer for someone whose need shrank but did not vanish.

1035 exchange. Once you hold a permanent policy, Internal Revenue Code section 1035 allows a tax-free exchange into another life contract or a qualified long-term care contract with basis carrying over. Relevant after conversion, not before — you cannot 1035 a term policy with no cash value into anything useful.

Accelerated death benefit rider. Many term policies carry one at no additional premium. If the insured has been certified terminally ill, a qualifying accelerated payment is generally excluded from income under Internal Revenue Code section 101(g) and requires no buyer, no underwriting, and no conversion. Check the rider schedule before doing anything else.

Convert, then sell. The subject of this page. Realistic when the conversion window is open, the death benefit is roughly $100,000 or more, and the insured’s age or health supports an offer.

When Converting to Sell Is the Wrong Move

Be blunt about this, because the conversion decision is expensive to reverse.

When the insured is in good health for their age. Life expectancy underwriting drives pricing. A healthy 68-year-old with a long projected life expectancy generates low offers or none, and the conversion premium you incurred is real money spent chasing a transaction that will not clear.

When the face amount is small. Below roughly $100,000 of death benefit there is generally no market, and conversion adds a permanent premium to a policy nobody will buy.

When the conversion window has closed. Ask the carrier whether any extension exists — a few have offered them in limited circumstances — but if the answer is no, the practical choices narrow to paying the renewal premium or letting the coverage end.

When someone still needs the coverage. If a survivor depends on the death benefit and the converted premium is payable, convert and keep. A lump sum today does not replace protection someone was counting on.

When the conversion premium would be funded by borrowing. Taking a loan to carry a policy while waiting for an offer that may not come is how a manageable problem becomes an unmanageable one.

For a broader head-to-head, see life settlement versus term conversion.

What the Numbers Tend to Look Like

The most-cited public benchmark remains the U.S. Government Accountability Office’s study of the life settlement market, GAO-10-775, which found that policy owners who sold typically received somewhere in the range of roughly 10% to 35% of face value, and multiples of what the same policies would have produced on surrender. For a term policy that comparison is stark, because term has no surrender value at all. The alternative to a sale is not a smaller amount of money; it is zero.

Term conversion is also rare. Industry studies have consistently found that only a small single-digit percentage of convertible term policies are ever converted, which means most of these rights simply expire unused. That is a market inefficiency rather than a reason to convert — but it does mean many people are sitting on a contractual right they have never once looked at.

On taxes, know the framework and then talk to your own CPA. Since the Tax Cuts and Jobs Act of 2017, a seller’s cost basis in a life insurance policy is not reduced by cost of insurance charges, reversing the earlier position in Revenue Ruling 2009-13, and the change applies to transactions after August 25, 2009. The same act added reporting under Internal Revenue Code section 6050Y, which is why sellers receive a Form 1099-LS after a reportable policy sale. For a converted term policy, basis is generally the cumulative premiums paid, which for term is often small relative to the sale price.

A Working Timeline and What to Send

Plan on 90 to 150 days from first review to funded payment, with conversion slotted in near the end. Weeks 1 to 2: obtain the conversion deadline and product list in writing, plus the rider schedule and current premium notice. Weeks 2 to 6: HIPAA authorization, medical records, life expectancy underwriting. Weeks 6 to 10: offers, if any. Weeks 10 to 14: convert into the agreed product, execute the closing package, change of ownership and beneficiary, escrow funds after the carrier confirms the change in writing.

To start, you need very little: the policy cover page showing carrier, policy number, face amount and issue date, and the rider schedule if you have it. If you cannot find either, the carrier will reissue them to the owner of record. Pine Lake Legacy offers a free, no-obligation policy review — send the cover page or call (732) 978-9575. If the honest answer is that the policy has no market value, you will be told that, and you will not have spent a dollar converting anything. Nothing here is legal, tax, or investment advice; consult your own professionals before converting or selling.

Frequently Asked Questions

Should I convert before or after I find out what the policy is worth?

After. Conversion creates a permanent premium obligation the moment it takes effect, and if no offer materializes you are carrying that cost for nothing. Get the policy reviewed as term, confirm a market exists, then convert into the specific product the transaction calls for and move quickly to closing.

Can I convert only part of my term policy?

Most carriers permit partial conversion subject to a minimum face amount, though the rules vary and a few do not allow it. Partial conversion is often the most practical answer for someone whose coverage need shrank: convert an amount you can afford to carry, let the balance expire, and skip the sale question entirely.

Does converting require a medical exam?

No. That is the defining feature of a conversion rider. It is a contractual right exercised without new health underwriting, which is exactly why it can be valuable to someone whose health declined after the policy was issued. Health does affect what a buyer would pay, but it does not affect your right to convert.

Which permanent product should I convert into?

If you plan to keep the coverage, the one that fits your need and budget. If a sale is the objective, a guaranteed universal life chassis with a contractual no-lapse guarantee is usually the most attractive to a buyer because the future carrying cost is knowable. Ask the carrier which products your policy is convertible into today.

Who pays the permanent premium between conversion and closing?

You do, until ownership actually transfers and the carrier records the change. Transactions are commonly structured to keep that stretch short, but nobody can guarantee timing in advance. Budget for at least one permanent premium payment and treat anything faster as a bonus rather than the plan.

What if my conversion deadline has already passed?

Ask the carrier in writing whether any extension is available, since a handful have offered them in narrow circumstances. If the answer is no, the realistic options are paying the annually renewable premium as a bridge or letting the coverage end. An unconvertible term policy nearing expiry has essentially no secondary-market value.

How is a sale taxed if I converted first?

In general, proceeds up to your cost basis are not taxable, with amounts above basis split between ordinary income and capital gain under the framework in Revenue Ruling 2009-13. Since the 2017 tax law, basis is no longer reduced by cost of insurance charges. You will receive a Form 1099-LS. Have your own CPA run your specific numbers.

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