Many Irrevocable Life Insurance Trusts (ILITs) hold term life insurance policies — often because they are an affordable way to secure coverage during a set period. But while term coverage can serve a purpose, it doesn’t last forever. At some point, the insured’s health, the trust’s liquidity needs, or the policy’s expiration date may trigger the need for more permanent protection.
The good news? Most term policies have a conversion feature, which is a contractual right to exchange term coverage for a permanent policy without undergoing new medical underwriting. The bad news? If trustees miss the conversion window, that right disappears, potentially leaving the trust without coverage or forcing the insured through a costly and uncertain underwriting process.
For trustees, this isn’t just a missed financial opportunity. It can be a fiduciary risk.
Why Term-to-Permanent Conversion Matters in ILITs
The ability to convert term to permanent life insurance coverage can be a valuable safeguard for ILITs because:
- It preserves insurability: Health can change unexpectedly. Conversion allows securing lifetime coverage even if the insured becomes uninsurable.
- It aligns with long-term trust goals: ILITs often exist to provide liquidity for estate taxes or wealth transfer needs that extend beyond the term period.
- It avoids surprise lapses: Without action, term policies simply expire at the end of their level term, leaving the trust without its key asset.
Know Your Deadlines: The Trustee’s Conversion Tracker
Term policy conversion deadlines vary by carrier and product type. Some allow conversion any time before the end of the term; others set earlier deadlines, such as the policy’s 10th or 15th anniversary.
Trustees should:
- Review the policy contract for specific conversion terms.
- Create a deadline tracker to flag upcoming conversion dates at least 12–18 months in advance.
- Order updated in-force illustrations to compare the cost of keeping the term policy versus converting.
Tip: If the insured is older or in declining health, consider starting the conversion process well before the deadline to avoid administrative delays.
Common Use Cases for Conversion
- Health Decline: If the insured has developed medical issues, conversion may be the only way to secure permanent coverage without new underwriting.
- Long-Term Estate Liquidity Needs: When the ILIT’s purpose extends beyond the original term length, permanent coverage ensures ongoing funding.
- Policy Replacement: If market options have improved, conversion followed by a 1035 exchange can help secure a better product.
- Beneficiary Security: Ensures coverage stays in place during major life changes, such as a change in business ownership or marital status.
Pitfalls to Avoid
- Waiting Too Long: Missing the conversion window means starting from scratch with underwriting, often at much higher premiums.
- Failing to Communicate: Not informing beneficiaries about the potential impact of losing coverage can cause disputes.
- Overlooking Costs: Permanent insurance is more expensive. Trustees should confirm that the trust can sustainably fund premiums post-conversion.
- Ignoring Alternatives: Sometimes a reduced face amount, life settlement, or partial conversion may be more strategic than a full conversion.
Trustee Best Practices for Managing Term Policies
- Annual Review: Include conversion deadlines in your annual policy review checklist.
- Early Action: Treat conversion opportunities as time-sensitive and begin analysis early.
- Collaborate with Experts: Work with independent insurance advisors to evaluate product options and funding strategies.
- Document Every Step: Keep records of the analysis, recommendations, and communications with beneficiaries.
Learn More: Term Policy Secondary Market Sales
Conclusion
Term-to-permanent conversion is more than an administrative option — it’s a critical decision point for trustees managing ILIT-owned term policies. Acting early can preserve coverage, protect the trust’s objectives, and safeguard the trustee from avoidable risk.
LITCO helps grantors, their financial advisors, and estate planning attorneys navigate these decisions by acting as corporate trustee, providing expert policy reviews, deadline tracking, and fiduciary support — so you never miss an opportunity to protect the trust. Contact us to learn more about our trustee services.
