Term Life Insurance: Convertible Policy Worth The Cost?

Convertible term life insurance is a type of policy that can be converted to a permanent life insurance policy before the end of the initial term. It is a temporary term life insurance that can be turned into permanent life insurance that does not expire. It is a simple and affordable form of life insurance protection that offers the biggest death benefit payout for your money. However, it has its drawbacks, including the fact that the protection is temporary and there is no cash value build-up. On the other hand, permanent life insurance provides lifelong protection and builds cash value over time.

Convertible term life insurance: pros and cons

Convertible term life insurance is a type of insurance that allows you to change a term policy into a whole or universal policy without going through the health qualification process again. This means that you can switch from temporary coverage to permanent life insurance that will not expire.

Pros

• You can obtain less expensive term coverage today, with the option to convert it to a permanent policy at a later date with the same death benefit.
• You can avoid the medical underwriting process, which is especially beneficial if your health has declined since you started the policy.
• You can protect your loved ones with insurance immediately while keeping the option to switch to permanent coverage when you can afford it.
• You can convert your policy without incurring a fee.
• You can convert your policy without a deadline, as long as it is within the term.
• You can choose to convert only a portion of your term policy to permanent coverage while retaining the rest as term coverage.

Cons

• Convertible term life insurance policies charge higher premiums than traditional term policies, and total premiums will increase again if and when the conversion is carried out.
• You will need to pay more for permanent coverage than if you had bought the permanent life insurance policy at the beginning rather than buying term and converting later.
• If you don't intend to convert your policy, you may be paying more for a conversion rider you'll never use.

How does convertible term life insurance work?

A convertible term life insurance policy allows you to obtain less expensive term coverage today with the option to convert it to a permanent policy at a later date with the same death benefit. This can be a valuable alternative if your insurance needs, financial resources, or medical situation change in the future.

Most term life policies are "level term life insurance," which means the premium (and death benefit) stay the same for the length of the term, which could be 5, 10, 15, 20, or 30 years. A convertible level term policy works precisely the same way – but it has a provision or "rider" that gives you the option to convert to a permanent life policy later on. If you don't exercise the conversion option, the policy will continue to protect you until the end of the term with no change.

The conversion option may be part of the basic insurance contract, or it might be available by purchasing a special rider and attaching it to your policy. Some insurers offer the conversion option for the first few years of the policy at no charge and then provide the opportunity to add a conversion rider later only for an extra cost.

The biggest benefit of convertible insurance policies is that policyholders don’t have to undergo medical underwriting again to switch to a permanent plan. When you apply for a new insurance policy, there's an underwriting process in which the insurance company evaluates your age, lifestyle, and health status – via questions and a medical exam – to determine your premium cost. But when you convert a policy, you get to keep the health rating you had when the policy started. There are no health questions, and no medical exam to uncover health issues that might raise your premium cost.

While permanent life insurance carries higher premiums than term, it also provides a number of benefits, including life-long coverage, level premiums, and tax-free cash value accumulation.

When you convert, the insurer cannot increase the cost based on your health status. You receive the same health rating as when you first signed up for coverage, even if you develop health problems later. However, the cost of the permanent coverage will be based on your age when you convert. It will be more expensive than if you had bought the permanent life insurance policy at the beginning rather than buying term and converting later.

To find out if your term policy is convertible, read the policy documents or contact your life insurance company. If you’re shopping for life insurance, be sure to ask about this feature before you sign the contract. Life insurance needs can change over time, and convertible term life insurance gives you flexibility to adjust accordingly.

Reasons to get convertible term life insurance

Convertible term life insurance is a type of temporary term life insurance that can be turned into permanent life insurance that will not expire. Here are some reasons why you might want to consider getting convertible term life insurance:

Peace of Mind:

Convertible term life insurance gives you the flexibility to change your type of insurance coverage as your life changes. It offers peace of mind, knowing that you can adapt your policy to meet your evolving needs and circumstances.

No Additional Medical Screening:

One of the biggest advantages of convertible term life insurance is that it allows you to switch from a term policy to a permanent policy without undergoing a new health screening process. This is especially valuable if your health has declined since you purchased the original policy, as it guarantees your ability to obtain permanent coverage.

Cost-Effectiveness:

Convertible term life insurance can be a cost-effective solution, especially if you can only afford a less expensive term policy now but anticipate being able to afford a more expensive permanent policy in the future. By starting with a term policy, you can lock in a lower rate and then convert to a permanent policy when your financial situation improves.

Long-Term Protection:

If you expect to still need life insurance after your term policy expires, convertible term life insurance allows you to switch to a permanent policy, such as whole life insurance, which typically provides lifelong coverage. This is ideal if you want to ensure continued financial protection for your loved ones, especially if you're still providing for dependents or paying off debt.

Tax Benefits:

Permanent life insurance policies, such as whole life insurance, offer tax benefits that are not available with term policies. These include tax-deferred cash value accumulation and the ability to access the cash value to help with major expenses or supplement retirement income.

Adaptability:

Convertible term life insurance allows you to adapt to changing circumstances, such as having another child or taking on additional financial obligations. It gives you the flexibility to extend your coverage and ensure that your family is protected, even if your needs evolve over time.

Reasons to avoid convertible term life insurance

While convertible term life insurance can be a good option for some, there are several reasons why it may not be the best choice for others. Here are some reasons why you may want to avoid convertible term life insurance:

Higher Premiums

Convertible term life insurance policies typically come with higher premiums than traditional term policies. The total premiums will also increase if and when the conversion is carried out. This is because there is a built-in cost for the option of being able to make the conversion without a medical exam. The cost of permanent coverage will be based on your age when you convert, so it will be more expensive than buying a permanent policy at a younger age.

Limited Conversion Window

Most convertible insurance policies only allow policyholders to convert for a predetermined number of years, such as 10 or 20 years. If you wait too long and exceed this conversion deadline, you will lose your option to convert without a health screening. This limited window may not provide the flexibility that some individuals are looking for.

May Not Be Needed

If you already know that you only need life insurance coverage for a fixed amount of time, convertible term life insurance may not be necessary. For example, if you are purchasing life insurance to protect yourself from a specific, limited-time financial obligation, such as a mortgage, the convertibility clause is unlikely to be exercised. In such cases, a traditional term policy that aligns with the duration of the obligation may be more suitable and cost-effective.

Cost vs. Benefit

While convertible term life insurance offers the flexibility to switch to a permanent policy, it comes at a cost. Permanent life insurance premiums are substantially higher than term policies. If you convert your term policy to a whole life policy, you can expect your premiums to increase significantly. This increased cost may not be feasible for everyone, especially if the permanent coverage is not truly needed.

Complexity

Convertible term life insurance can be more complex than traditional term policies. Understanding the conversion options, deadlines, and features of the permanent policy can be confusing. Individuals may need to consult financial professionals to make sense of all the variables and determine if convertible term life insurance aligns with their long-term goals. This added complexity may be a deterrent for those seeking a straightforward insurance solution.

How to get convertible term life insurance

If you're interested in getting convertible term life insurance, you can start by shopping for policies online. Many insurance companies allow you to get quotes and compare rates for convertible policies on their websites. You can also reach out to a financial professional for guidance in choosing the right type and amount of coverage for your needs.

When considering a convertible term life insurance policy, it's important to understand the conversion options offered by the insurer. Most policies allow for conversion for a predetermined number of years, such as 10 or 20 years. Some insurers may offer conversion for the first few years at no additional charge, while others may require you to purchase a special rider to extend the conversion option.

Additionally, it's worth noting that convertible term life insurance policies typically come with higher premiums than traditional term policies. This is because they offer the added benefit of being able to convert to a permanent policy without undergoing a new health screening process. However, even with this added cost, convertible term life insurance may only be fractionally more expensive than a non-convertible policy.

When deciding on a convertible term life insurance policy, be sure to consider your long-term needs and financial situation. This type of policy may be particularly suitable if you have concerns about developing health problems, uncertainty about the duration of coverage needed, or worries about the cost of renewing term life insurance in the future.

Frequently asked questions