Convertible Term Life Insurance

What Is Convertible Insurance?

Convertible life insurance is a type of term life insurance that allows you to convert your term policy into a permanent policy. Term life insurance policies last for a set number of years, while permanent life policies never expire if you continue to pay the premiums.

With convertible life insurance, you can convert your policy without going through the application process again. In most cases, you won’t need to provide proof of insurability or undergo a medical exam to change your term life policy into a permanent one.

However, permanent life insurance tends to have costlier premiums than term life insurance. When your policy converts to permanent coverage, your premiums are likely to increase.

If you’re receiving term life insurance coverage through your employer, that policy likely has a conversion privilege. According to an article from the American Council of Life Insurers, most states require term life policies provided through employers to come with the option to convert to a permanent policy. If your employment is terminated, you can retain your coverage by using the conversion privilege.

Convertible life insurance provides flexibility for the insured to plan for years or decades down the road. Although permanent insurance may not be necessary today, purchasing the option to own permanent insurance in the future will allow consumers to side-step medical exams and save more on permanent policy premiums.

Stephen Kates, CFP®Principal Financial Analyst for Annuity.org

Stephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for Annuity.org, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.

How Does Convertible Insurance Work?

In some ways, convertible life insurance works like other types of life insurance. You’ll pay monthly premiums to keep your coverage active during the policy’s term. If you pass away during the period that the policy covers, your beneficiary will receive a death benefit.

A convertible policy allows you to convert your life insurance coverage from term to permanent either during or at the end of the policy’s term. Most companies will allow you to convert the term policy into either a whole life insurance policy or universal life insurance.

When you decide to convert your policy, your insurance agent will help you work through the details. You can choose which type of permanent life insurance you’re converting to. You also have the opportunity to choose a new death benefit amount for the policy. Both choices will factor into how much the policy’s new premium will be.

It’s also important to note that conversion privileges may have an expiration date. “Some insurance policies allow you to convert up until the last day of coverage and some limit the window to the first 10 or 20 years,” Chartered Life Underwriter Natasha Cornelius told Annuity.org.

A convertible life insurance policy is different from a renewable life insurance policy. Renewable life insurance extends your coverage by renewing a term life policy into another term life policy when the contract term ends. Convertible life insurance, on the other hand, changes the policy from term to permanent, so your coverage will not expire.

Pros and Cons of Convertible Insurance

Convertible life insurance offers customers the ability to extend their coverage and choose the permanent life policy that best suits them. However, there are some costs associated with this type of policy. Before you purchase a convertible life insurance policy, it’s important to understand the benefits and drawbacks of this option.

Advantages

Convertible life insurance offers greater flexibility compared to other life options. With a convertible policy, you can choose which type of permanent life insurance you want to convert your policy to. You can also choose to convert a certain amount of your coverage and keep the rest under a term policy that you renew.

A convertible policy’s premiums are more expensive than typical term life, but less expensive than most permanent policies. This makes convertible policies ideal for people who want permanent coverage but don’t currently have the means to afford it.

Converting your policy can help you get more coverage for your money, says Sophia Jones, a financial consultant. “This is because the premiums will be lower than they were when you had the term policy,” says Jones. “Term policies are only guaranteed for a certain number of years and don’t offer any cash value. By converting your policy to permanent life insurance, you can lock in a lower premium and receive more coverage.”

Some convertible policies offer premium credits that you can earn during your policy’s term. When you decide to convert the policy to a permanent one, you can use those credits to get a temporary discount on the new premium amount.

Finally, a convertible policy doesn’t require a medical exam or underwriting. If you have pre-existing health issues that make it difficult to find an affordable permanent life insurance, a convertible policy could be a solution.

Disadvantages

One potential drawback of a convertible life insurance policy is the change in premiums. When you’re investigating convertible policies, consider the cost you’ll pay when the policy activates, as well as the new premium you’ll pay when you convert the policy.

Occasionally, insurance providers will include a convertible term life clause in your contract at no extra charge. Most of the time, though, you’ll pay a higher premium for a convertible term life plan.

Permanent life insurance coverage is more expensive than term, so your premiums will increase once you’re paying for a permanent policy. However, you may be able to reduce the new premium’s cost via premium credits or by converting only part of your policy’s coverage to permanent insurance.

Is Convertible Insurance Right for You?

Convertible term life policies may be best for people who want or need permanent life insurance coverage but have trouble getting it. “Converting may be a good option if you want to change your coverage but are not eligible for a new policy due to health reasons,” says licensed independent insurance agent Linda Chavez.

Converting your term life policy into a permanent one might make more sense than letting your term coverage lapse and purchasing a new permanent policy. You won’t have to meet certain eligibility requirements like you would with a new permanent policy.

Choosing to convert your policy also gives you the flexibility to only convert part of your coverage. This can be helpful if you can’t afford a full permanent policy.

Because convertible policies typically have a lower death benefit than permanent policies, the premiums for a converted policy will be lower than that of a permanent policy.

When shopping for a term life insurance policy, investigate a company’s permanent life insurance offerings. Some life insurance providers might have good term insurance options, but less competitive permanent policies.

If you want to purchase a convertible policy, consider choosing an insurance company that’s strong in both term and permanent offerings.