Once your policy converts, the premiums will jump because you’ll be paying for permanent life insurance, which can cost six to 10 times more than term life insurance. That’s because permanent insurance builds cash value and covers you for life, while term life insurance only covers you for a specified number of years. The conversion is usually allowed during a certain eligibility period, such as 10 years or before age 70. The eligibility period varies from insurer to insurer, but it won’t last forever.
Example of Convertible Term Life Insurance
Let’s say Lisa purchased a 20-year, $100,000 convertible term life insurance policy that allows her to convert anytime before she’s 55 years old. Three years after getting the coverage, Lisa’s circumstances change. She’s been diagnosed with a treatable form of cancer and decides she wants peace of mind by getting whole life insurance, which will cover her for the rest of her life instead of ending in 17 years as her term life policy will. Lisa figures whole life insurance will provide financial security over a longer period, thanks to the policy’s cash value component, so she converts her term policy into a whole life one. To make this switch, Lisa must pay higher premiums. However, she doesn’t need to undergo a medical exam or answer questions about her health. Her premiums will be based on her health classification when she first got her term insurance.
Term Life Insurance vs. Permanent Life Insurance
Because a convertible term policy allows you to switch from a term policy to a permanent policy, it helps to know how the two types of coverage differ.
Term Life Insurance Basics
Term life insurance covers a policyholder for a certain period of time—10, 20, or 30 years, for example. If the policyholder dies during the policy’s term, beneficiaries typically receive a lump-sum amount of money known as a “death benefit.” A term life insurance policy expires at the end of the term unless you pay to renew the coverage. Premiums don’t change throughout the term. Because there is a chance you will outlive the term and not receive a death benefit, term life is usually much more affordable than permanent life insurance. It also costs less because there is no cash value feature.
Permanent Life Insurance Basics
The two common types of permanent life insurance you can convert to are whole life and universal life:
Whole life: This type of policy covers you throughout your life unless you cash out the policy or fail to pay premiums. It has a level premium that never changes and a cash value that grows at a set interest rate. You can borrow or withdraw from the cash value, but if you don’t repay it, your death benefit may be reduced. Universal life: UL also generally covers you for life. But in many cases, you can adjust the death benefit and premium amounts, which can’t be done with a whole life insurance policy. The cash value typically earns interest based on market conditions, but is subject to a minimum.
Should You Convert Your Term Life Insurance to Permanent?
Converting a term life insurance policy to a permanent life insurance may be a good option for:
Someone who is in poor health and wants permanent lifetime coverage rather than temporary term coverage. Convertible life insurance doesn’t require someone to go through a medical exam or divulge any information about their health.Someone who is healthy now but worries that their health eventually might take a turn for the worse. A convertible policy removes concerns about what your health will be like down the road, since neither a medical exam nor a health questionnaire is needed to convert to permanent life insurance.Someone who wants to make money from their life insurance through a cash value feature that earns interest on savings or can provide gains from investments.Someone who can afford to pay higher premiums for permanent life insurance now.Someone who wants to ensure there’s a death benefit for beneficiaries. A permanent life insurance policy is much more likely to make a payout to beneficiaries than a term life insurance policy is, simply because a permanent policy is lifelong coverage, whereas a term policy ends after a certain number of years.
Alternatives to Converting Your Term Life Insurance
Several alternatives to convertible term life insurance are available. If you have a term policy, you could instead:
Renew your existing term life insurance policy Shop around for new term life insurance from a different provider Let your term life insurance expire and go without coverage Buy burial insurance, which will cover end-of-life expenses, but not much more
title: “What Is Convertible Term Life Insurance " ShowToc: true date: “2022-12-19” author: “Eileen Mcwhite”
Learn more about convertible term life insurance, including how it works and whether it might be a good life insurance choice for you.
Definition and Examples of Convertible Term Life Insurance
Life insurance policies take two basic forms, either term insurance or permanent life insurance. Permanent life insurance is designed to last a lifetime, no matter how long you live. Term policies are designed to last only a certain number of years, usually anywhere from 5 to 30 years or more. All policies are usually a variation of these two types. One of these variations is convertible term life insurance, which lets you convert your term insurance policy to a permanent life policy without a medical exam or health assessment. The main advantage of convertible term life insurance is that you can purchase a temporary life insurance policy, which costs less than a permanent one but leave the option open to convert to a permanent policy at a later date. Plus, you don’t have to go through the underwriting process—health questions and possibly a medical exam. Your premium for the permanent policy is based on the information you supplied when you applied for the term policy and your current age. Convertible term coverage may be ideal for young families who eventually want the peace of mind of permanent life insurance, but can’t immediately afford the premiums. Keep in mind that premium rates will rise if the policy is converted to a permanent one. For example, let’s say you have young children and need life insurance, but you can’t afford the higher payments of permanent life insurance. So you buy a 20-year term policy with a conversion clause. Four years later, you earn more money and you can afford permanent life insurance, so you convert your term policy to a permanent one.
How Convertible Term Life Insurance Works
As the term of a convertible term policy ends, you may have the option to renew, convert to permanent life, or drop the coverage. But you don’t have to wait for the policy to end to convert it, and in some cases, you shouldn’t. If you want to convert, you’re required to do it during the conversion period, whose length depends on the type of term policy you have. You can also choose to convert a portion of the policy to permanent coverage. You may be able to do this multiple times or just one, check your policy documents for details. You won’t take a medical examination if you convert to permanent life within this period and you’ll be approved for coverage. The premium rate for your new life policy is based on your age on the conversion date and on your health when you applied for the term policy (not on your current health). Though you can make this switch without taking a medical exam, you should still expect higher premiums. The higher premiums you pay for permanent life insurance (relative to term coverage) reflect the additional cost of building up cash value and the extended length of coverage.
Do I Need Convertible Term Life Insurance?
Your reasons for having life insurance may change over time. Convertible term life insurance lets you start with a less expensive policy while giving you the option to switch to permanent life insurance without a medical exam when your finances and insurance needs change. You may want to consider a convertible term insurance policy in several circumstances.
You Want Permanent Coverage But Can’t Afford It
If you’d like to have a permanent insurance policy, but just can’t afford one right now, getting a term policy with a conversion option allows you to lock in a rate based on your current health. As your financial situation improves, you can convert some or all of the term coverage to permanent.
You Have Outstanding Debt
Term life insurance protects your dependents from financial hardships if you pass away when your policy is still active, and having term coverage allows you to put more money towards paying down your debt (relative to having a more expensive permanent policy). But what if when your policy expires you still have outstanding debt? With convertible term life insurance you can switch to permanent life insurance, so that your dependents continue to be protected no matter when you die.
You Have Dependents
If you have dependents, you probably need life insurance. But having dependents can be an expensive proposition and a term policy may be all you can afford. Instead of waiting until your finances improve to get permanent coverage, a term policy can provide the coverage you need now at a price you can handle. If you have a lifelong dependent—say a special needs child—a permanent policy is ideal. But if you can’t afford one or can’t afford the amount of coverage you need with a permanent policy, then convertible term coverage may be your second best bet. In this way, you can get the life insurance you need at a price you can afford and convert it to permanent coverage when you’re in a financial position to do so.
