Life Insurance

What is Convertible Term Life Insurance?

While there are many benefits to standard term life insurance, your protection is only temporary. Therefore, when your term ends, your former beneficiaries resume responsibility for your funeral costs and outstanding financial obligations. Convertible term life insurance allows you to permanently extend your term without your premium going up due to health-related concerns.

Convertible Term Life Insurance

Term life insurance policies are the most popular in the US and offer financial protection for your family and business associates for a specific period, known as a term. However, when the term ends, so does the protection for your beneficiaries. That means your survivors become responsible for paying for your funeral costs, outstanding financial obligations, and other end-of-life expenses.

Convertible term life insurance allows you to extend your current term without undergoing another medical underwriting process. In turn, it saves you a trip to the doctor and locks in your current premium rates. Most importantly, convertible term life insurance provides you peace of mind knowing your family is protected without your potentially paying higher monthly premiums.

What Is Convertible Term Life Insurance? 

Convertible term life insurance allows you to change your plan anytime without undergoing another medical exam or answering any health-related questions. This process is commonly known as medical underwriting, and bypassing it will save you money over the long term.

Life insurance policy rates are determined by how “risky” the applicant appears, with “riskier” applicants paying higher premiums. In life insurance, risk is correlated with the likelihood of death. Because people’s health generally deteriorates as they age, having to partake in underwriting at age 65 will produce higher rates than underwriting performed at 45.

With a convertible term policy, if you were to accept a term life insurance policy at 45 and ultimately convert to a permanent life policy at 65, you would continue to pay the same premium you’ve been paying for the last 20 years. Further, these policies guarantee the same payout to your beneficiaries.

What is Term Life Insurance?

With a regular term life insurance plan, you pay a premium for a set period–typically spanning over a decade or two. Your family receives a cash benefit if you die within that period. However, there is no payout if you live past the length of your term without renewing or extending your plan. Therefore, while they are popular, term policies carry some risk of leaving your beneficiaries unprotected if you pass while your policy has lapsed.

How a Convertible Life Insurance Policy Works 

A convertible life insurance policy differs from standard term coverage because it allows you to extend your plan into permanence even if new health problems arise. Keep in mind that you will see an increase in premium rates if you choose to convert. However, once the conversion is completed, that rate is locked in permanently.

However, convertible term coverage is not your only choice if you’re considering extending your policy past the end of its term. Another option is renewable term life insurance, which extends your plan at the end of its term, but adds an increasing annual premium.

What to Consider When Getting a Convertible Term Life Policy 

Convertible term life insurance allows you significant flexibility should your life circumstances suddenly change, providing stability if:

  • You develop new health problems
  • Unforeseen financial obligations occur
  • You experience additional budgetary constraints
  • You outlive the length of the term

Because of its versatility, convertible term life insurance has the potential to provide benefits to a wide array of people with a diverse set of needs.

Will You Develop Health Problems? 

Many people experience health problems as they age. Convertible term policies are beneficial because you would not have to undergo further medical underwriting to extend your plan. Therefore, even if you received grave health news, you can take solace in knowing your beneficiaries are covered regardless.

Say you receive a cancer diagnosis right before your regular term plan expires. Even with the best doctors, you would likely see your premiums spike when trying to renew your plan. A convertible life insurance plan would allow you to continue coverage without worrying about spiking rates.

How Long Will You Need Protection For? 

One of the most significant decisions people face when choosing a plan is the length of the term. Traditionally, most people buy life insurance plans that protect their family until their youngest child reaches college age. This practice allows your children protection while they are too young to pay for expenses themselves.

However, life tends to change quickly. If you experience an unforeseen life event, having the flexibility to change the length of your term can be critical.

What is Your Budget? 

For many, their budget flexibility dictates what type of insurance policy they purchase.

While you can purchase a new policy once your current term expires, every renewal comes with a higher premium and added fees. Convertible term coverage essentially allows you to bypass these renewal hikes. 

If you are living on a fixed income or are experiencing financial difficulties but still want guaranteed coverage, consider looking into partial convertible term coverage. Partial-term conversions allow you to continue your premiums without the total payout of the original term. For example, if you were insured for $200,000 and proceeded with a partial-term conversion, your family may receive $100,000. However, while your beneficiaries may ultimately receive less, your premiums are pro-rated, and you will not have to go through medical underwriting.

Do You Want Your Payments to Go Towards the Future? 

If you only have standard term life insurance and outlive your term, your beneficiaries do not receive any death benefit. With convertible term coverage, your financial contributions grow over time, making it one of the easiest and least expensive ways of extending your plan.

How Convertible Term Life Insurance Works

There are many approaches to setting up your life insurance plan, each providing benefits.

While most insurers have individual regulations regarding term conversion, those nuances mainly pertain to premium cost, term length, conversion options, and additional fees and commissions.

Premium Cost 

Convertible term life insurance premiums may be fractionally more expensive than standard term life insurance. However, when you convert your policy, there may also be an uptick in your rates.

In contrast, insurers would base new premiums on current permanent life insurance market rates if you were to get a new policy. These increases range from 6 to 15 times more than your current rate. Therefore, even with the fees associated with conversion, it’s usually cheaper, especially if you are in bad health.

Term Length 

A life insurance term’s length can vary widely, usually ranging from 5 to 30 years. Convertible term life insurance works similarly, except with a provision allowing you to convert to a permanent plan. Every policy is different, but some examples of typical conversion periods include:

  • Before the term ends or before you turn 70, whichever comes first
  • During the first 20 years of a 30-year policy
  • Before the policy’s 10th anniversary

Conversion Options 

If you eventually convert your term policy, it becomes “permanent” coverage. There are many types of permanent life insurance plans, and you will need to select which one your term coverage will become. While there may be fewer available options than if you purchased a new policy, you usually will be able to select between:

  • Whole life insurance provides coverage for your entire life and cash benefits that gain interest.
  • Universal life insurance is a flexible life insurance plan that allows you to choose your premiums, directly affecting the amount of tax-free cash set to build up in your account. You can leave this for your family when you die or use it while you are still alive to supplement your retirement.

Fees and Commissions 

Agents receive commissions on the insurance policies they sell, usually deducted from your monthly premium. The amount of a seller’s commission may vary depending on the type of plan you buy from them.

Whole life insurance premiums usually incur the highest fees, while term insurance plans typically incur the lowest. These commissions are worth considering and comparing when shopping for a plan.

The Pros of Getting a Convertible Term Life Insurance Policy 

There are many good reasons to consider a convertible term plan when comparing life insurance options. These include, but are not limited to:

  • Lifelong coverage: A convertible plan allows you to extend it through the rest of your life, should it suddenly suit your needs.
  • No medical underwriting:  Declining health won’t negatively affect your premium.
  • Coverage for lifelong dependents:  Perhaps you have a child with special needs, or maybe your spouse is disabled. Your death benefit would cover their living expenses after you pass away.
  • Builds cash value:  Permanent life insurance builds cash value over time that you can access while you’re still alive.

The Cons of Getting a Convertible Term Life Insurance Policy 

As with many decisions involving insurance, some factors may inhibit convertible term coverage from being the right choice for some people, specifically:

  • Higher premiums: If you choose to convert your policy, your premium will reflect your current age but your health assessment reflects your initial medical underwriting only. While the corresponding premium increase may be less than that of a new policy, it is still worth considering during the application process. Ask your agent for more details about how much that increase may be.
  • You’re locked in: Once you convert your term to permanent, you can’t change your mind and reverse the decision. Before committing to it, ensure you are confident the conversion is right for you.

Further, you may not need convertible term coverage if you already have a permanent life insurance plan or only need a specific amount of coverage.  

How To Buy a Convertible Term Life Policy 

The internet is a great resource for finding appropriate coverage if your workplace does not offer a life insurance plan. Most major insurers allow you to get fast quotes on their websites, compare policies against each other, and even apply for a policy directly through their website.

Alternatively, if you believe you need additional help through the application process, an insurance broker or agent may be able to walk you through the process. An agent can help explain each policy’s details and nuances, answering your questions along the way. Further, they may be able to create a customized policy to address your specific needs.