Converting term life insurance into whole life insurance: Opportunities and pitfalls for your retirement planning
9 Apr 2025
9
Minutes
Katrin Straub
CEO at nextsure
Would you like to convert your term life insurance into whole life insurance and wonder if this is possible and sensible? Many policyholders use this option to not only provide survivor protection but also to build up capital for old age. Find out here what requirements apply and what you need to pay attention to.
The topic in brief and concise terms
The conversion of a term life insurance into a whole life insurance is often possible within the first ten years without a renewed health examination (exchange right).
Higher premiums and lower flexibility during financial difficulties are significant disadvantages of life insurance compared to term life insurance.
Alternatively, a combination of an existing term life insurance policy and a separate savings plan (e.g., ETF, private pension) can offer more flexibility and potentially better returns.
Understanding the Basics: From Risk to Whole Life Insurance
A term life insurance policy covers only the risk of death and pays an agreed sum to the beneficiaries if the insured person dies during the term. It primarily serves to protect surviving dependents, such as families or to secure a loan of over 100,000 Euros. In contrast, the whole life insurance combines death protection with a savings process. Part of the contributions goes into capital accumulation, which is paid out at the end of the term or in the event of death – often including interest and surplus participation. The contributions for a whole life insurance are therefore typically 30 to 50 percent higher than those for a pure risk policy. These fundamental differences are crucial when considering a conversion of your term life insurance.
The Right of Exchange: Your Path to Transformation
Many insurers offer a so-called exchange right that allows you to convert your existing term life insurance into a whole life insurance policy. This right is generally limited to the first ten years after the contract begins. The biggest advantage is often that no new medical examination is required for the conversion, as long as the sum insured is not increased. This means that even if your health has deteriorated since taking out the term policy, you can benefit from a savings insurance policy. However, note that some insurers set specific deadlines for exercising this right, for example, the application must be submitted up to three months before the desired conversion date. You can find the exact conditions in your insurance documents. Checking these details is an important step before you change the insurance.
Weighing up the opportunities and advantages of the conversion
Converting a term life insurance policy into a whole life insurance policy can offer several advantages if your circumstances or financial goals change. The most obvious benefit is the additional accumulation of capital for retirement provision while maintaining death protection. For example, after five years of policy duration, if you have more financial leeway, conversion allows you to invest this additional money for the future. Another advantage is the previously mentioned option to do this often without undergoing another health check, which can be particularly valuable if health issues have arisen in the meantime. This way, you secure a combined protection that is tailored to your new life phase. Consider which coverage is currently suitable.
Consider potential disadvantages and cost factors
Despite the advantages, there are also disadvantages and costs to consider when converting a term life insurance. The premiums for a whole life insurance are significantly higher because they include the savings component. If you wish to maintain a death benefit of 200,000 euros, the monthly premiums can increase by 50 euros or more. An important aspect is the reduced flexibility in times of financial difficulty: If a whole life insurance is made premium-free, not only does the savings process pause, but often the death benefit protection does too, or it is at least significantly reduced. With separate contracts (risk coverage and a separate savings plan), you could pause one contract in case of emergency while the other continues. Additionally, the yields of traditional whole life insurance policies have often decreased over the past fifteen years. Weigh these points carefully before you convert your life insurance.
Case study: When is conversion worthwhile?
Imagine a young family: The main earner, aged 30, took out a term life insurance policy five years ago for €250,000 to safeguard his partner and child. Now, at 35, the income has increased and there is a desire to additionally prepare for retirement. Converting to an endowment policy might be sensible here, as the health check would likely be waived and the elapsed term would be credited. The monthly extra cost of, for example, €70 is considered investable. If he were to take out a new endowment policy now, the premium for the same coverage would be more expensive due to the higher entry age, and a health check would be unavoidable. This highlights the benefit of the exchange option. However, it is advisable to consider alternatives.
The following points favour a conversion in this scenario:
No new health check for the 35-year-old.
Combination of death protection and retirement provision in one contract.
Utilisation of increased income for long-term wealth accumulation.
The insurance sum of €250,000 remains available for the family.
These considerations help assess the personal situation better.
Expert Depth: Legal and Tax Aspects
From a legal perspective, the right to convert is embedded in the General Terms and Conditions (GTC) of your contract. There is no universal legal provision in the Insurance Contract Act (VVG) that mandates the conversion of term life insurance into whole life insurance; it is a contractual option. Although § 167 VVG regulates a form of conversion, it is aimed at the protection against seizure under § 851c ZPO and is usually not directly relevant for the purpose discussed here. It is important to note for tax purposes: If the term life insurance was concluded after 31 December 2004, the returns from the subsequent whole life insurance are generally taxable (often half, if certain conditions are met, such as a term of at least twelve years and payout after the age of 62). The conversion itself usually does not trigger immediate tax liability, but the later payout of the whole life insurance is subject to the tax regulations applicable at that time. Our expert tip: Have the exact impact on your policy reviewed by a professional, as individual contract details are crucial. A tax consultation is often advisable here.
Explore alternatives for conversion
Before converting your term life insurance, you should consider alternatives. One option is to keep the existing term policy unchanged and simultaneously set up a separate savings plan. This could be an ETF savings plan, a bank savings plan, or a private pension insurance. Separating risk coverage from capital accumulation often offers more flexibility. In times of financial difficulty, for example, you could temporarily suspend the savings plan without risking your death protection – an advantage over endowment insurance, which often combines both. Additionally, you can choose the investment form for your savings more freely and potentially achieve higher returns. Comparing total costs and the expected returns over a period of, say, 20 years, is insightful here. Weigh up whether the convenience of a combined product outweighs the potential disadvantages in flexibility and returns. Sometimes, making a policy paid-up is an option if it already exists and is financially burdensome, or considering the dynamics of older contracts.
Here are some separate savings forms as an alternative:
ETF savings plans for potentially higher returns with broad risk diversification.
Traditional bank savings plans with fixed interest rates for security-minded savers.
Private pension insurance (fund-linked or traditional) for targeted retirement planning.
Fixed-term deposit accounts for medium-term investments with guaranteed interest.
Building savings contracts, in case home ownership is planned later.
These options offer different risk-return profiles.
Conclusion: A personal decision with foresight
More useful links
Wikipedia offers information on term life insurance in Germany.
Wikipedia offers information on life insurance in Germany.
The Federal Ministry of Finance provides information on retirement planning and the Riester pension.
The Deutsche Bundesbank publishes its monthly reports.
FAQ
How much time do I have to convert my term life insurance?
The right of exchange is usually limited to the first ten years after the contract is concluded. You can find the exact period in your insurance terms and conditions.
Do I need a new health check for the conversion?
Usually, no new health assessment is necessary if you exercise the right to exchange and do not increase the insurance sum. If the sum is increased, a new assessment is generally required.
Are the contributions higher after the conversion?
Yes, the premiums for an endowment life insurance policy are considerably higher, as they include a savings component for capital accumulation in addition to risk coverage.
What are the disadvantages of the conversion?
The main disadvantages are higher contributions, reduced flexibility in case of payment difficulties (as risk and savings components are often linked), and potentially lower returns compared to modern, separate investment forms.
Can I adjust the insured sum during the conversion?
Yes, adjustments are often possible. Reducing the death sum can lower the contributions. An increase is usually associated with a renewed health check.
What if my contract does not include a right of exchange?
Without a contractually agreed right to exchange, a direct conversion is usually not easily possible. You would then have to cancel the term life insurance (which often does not result in a surrender value) and take out a new whole life insurance, including a new health check and under the conditions applicable at the time.
