Understanding Life Insurance: Conversion Periods Explained

A conversion period in life insurance refers to the timeframe during which a policyholder can convert their term life insurance policy into a permanent life insurance policy. Term life insurance provides coverage for a specific period, typically ranging from 10 to 40 years, after which the policy expires. However, many term life insurance policies offer the option to convert to a permanent policy, which provides coverage for the insured's lifetime as long as premiums are paid. The conversion period allows policyholders to make this switch within a certain timeframe, which varies depending on the insurance company. Some companies allow conversion at any point during the term, while others have conversion period limits, such as the first 10 years of a 20-year policy. It is important to check the specific terms of the policy to understand the conversion period and make an informed decision about converting to a permanent life insurance policy.

What is a conversion period in life insurance?

A conversion period in life insurance is a time frame during which a policyholder can convert their term life insurance policy into a permanent life insurance policy. Term life insurance policies are designed to last a certain length of time, after which the coverage expires. However, many term life insurance policies include a conversion option, allowing policyholders to switch to a permanent policy that lasts for the rest of their lives.

The conversion period for term life insurance policies varies depending on the insurance company and the specific policy. Some companies allow policyholders to convert at any point during the term of their policy, while others impose a conversion period limit. For example, the conversion period on a 20-year term policy might be limited to the first 10 years the policy is in force. It is important for policyholders to be aware of the conversion period specified in their policy to ensure they do not miss the opportunity to convert if they wish to do so.

Converting a term life insurance policy to a permanent policy is generally a simple process and does not require undergoing the medical examination or application process again. However, the premium for a permanent life insurance policy is typically much higher than that of a term policy, as permanent policies offer lifelong coverage and the potential to build cash value. When converting, policyholders can choose to convert their entire term policy or only a portion of it, depending on their needs and budget.

How does a conversion period work?

A conversion period in life insurance is the timeframe during which a policyholder can convert their term life insurance policy into a permanent life insurance policy. This is also known as a term conversion rider. Permanent life insurance policies do not expire and can last for the insured's lifetime as long as premiums are paid. They may also offer the potential to build cash value.

The conversion period for term life insurance policies varies depending on the insurance company and the specific policy. Some companies allow policyholders to convert at any point during the term of their policy, while others impose a conversion period limit. For example, the conversion period on a 20-year term policy might be limited to the first 10 years the policy is in force. It is important to check the specific terms of your policy to understand the conversion period that applies.

During the conversion period, policyholders can convert some or all of their term life insurance coverage into a permanent policy. This process is relatively simple and usually does not require a medical examination or an additional application. The majority of insurance companies allow conversions without requiring underwriting again, which means that any changes in the policyholder's health since the original policy was purchased will not affect their premiums. However, the policyholder's age at the time of conversion will impact the premium for the permanent policy.

To initiate the conversion process, policyholders should first confirm that their policy includes a conversion option and that they are within the conversion period. They can then determine how much of their term coverage they want to convert and contact their insurance company to discuss the specific permanent policy options available to them. The insurance company will provide information on the types of permanent policies that can be chosen, whether partial conversions are allowed, and any associated costs. Policyholders can then make an informed decision about the conversion and finalise the process by completing the necessary forms.

What are the pros and cons of a conversion period?

A conversion period in life insurance refers to the time frame during which a policyholder can convert a term life insurance policy into a permanent life insurance policy. Permanent life insurance provides coverage for the remainder of the policyholder's life, whereas term life insurance only covers a specific period. The option to convert is included in most term life insurance policies, but not all.

Now, let's explore the pros and cons of a conversion period:

Pros of a Conversion Period:

• Guaranteed Coverage: A conversion privilege guarantees coverage regardless of the policyholder's health status. This means that even if there is a serious change in health, the policyholder can still extend their coverage without undergoing a medical examination or the underwriting process.
• Flexibility: A conversion period offers flexibility to policyholders whose financial goals or circumstances change over time. For example, if an individual's health deteriorates or they develop a serious illness, converting to a permanent policy ensures continued coverage. It also allows individuals to build cash value over time, which can be beneficial for retirement or other financial goals.
• Lifetime Coverage: Converting to a permanent policy provides lifetime coverage, which can be essential for individuals who want to leave a financial legacy for their beneficiaries or cover final expenses.
• No Additional Medical Requirements: Converting a term policy to a permanent one does not require additional medical examinations or underwriting. The policyholder's original risk class and health status at the time of purchase are usually maintained.
• Partial Conversion Option: Policyholders have the option to convert only a portion of their term policy to permanent coverage, which can be useful when they don't need extensive permanent coverage.

Cons of a Conversion Period:

• Increased Premiums: Converting to a permanent policy typically results in substantially higher premiums. While health is not a factor, age certainly is, and the older the policyholder, the higher the premium.
• Limited Policy Options: Some insurance companies may offer limited choices for the type of permanent policy available for conversion, such as universal life insurance instead of whole life insurance.
• Conversion Period Expiry: Conversion privileges usually have an expiry date, after which the option to convert may no longer be available.
• Not Always Necessary: For healthy individuals, it may be more advantageous to explore the competitive insurance marketplace and apply for a new policy instead of converting, as conversion can be costly.
• May Not Be Needed: If an individual's financial situation or goals remain stable and their term policy meets their current needs, conversion may not be necessary.

When should you consider a conversion period?

A conversion period in life insurance is the timeframe in which you can convert your term life insurance policy into a permanent life insurance policy. This option is often included in term life insurance policies, allowing you to switch to lifelong coverage without undergoing a new application or medical examination. While converting to a permanent policy increases your premiums, it can be beneficial in several scenarios.

So, when should you consider a conversion period? Here are some key factors to keep in mind:

• Health Considerations: If your health has deteriorated since purchasing your original policy, or if you've been diagnosed with a serious medical condition, converting to a permanent policy guarantees continued coverage without the risk of higher rates or insurability issues. This is especially relevant if your health issues would make buying a new policy more expensive or render you uninsurable.
• Financial Dependents: If you have people relying on your income, such as children or aging parents, and you want to ensure their financial stability beyond the term of your current policy, converting to a permanent policy can provide that extended coverage.
• Additional Debts: In cases where you've taken on unexpected debts that won't be paid off before your current term policy expires, converting to a permanent policy can protect your family from bearing that financial burden.
• Budget Changes: If your financial situation has improved since purchasing your original policy, and you can now afford higher premiums, converting to a permanent policy can give you the option to extend your coverage with a higher death benefit.
• End-of-Life Costs: Permanent life insurance policies can help cover funeral expenses and other end-of-life costs. If you want to ensure your family isn't burdened with these expenses, converting to a permanent policy is a good option.
• Policy Expiration: If your current term policy is nearing its expiration and you still require coverage, converting to a permanent policy can provide a seamless transition without the need for a new application or medical exam.
• Peace of Mind: Converting to a permanent policy offers the assurance of lifelong coverage. This can be particularly valuable if you have a risky occupation or want to ensure your family's financial security regardless of when you pass away.

Remember, when considering a conversion period, review your policy carefully to understand the specific conversion options, timeframes, and associated costs. Additionally, consult with a qualified insurance agent or financial advisor to make an informed decision that aligns with your unique circumstances and goals.

How much does it cost to convert a policy?

There are no fees to convert a term policy to a permanent policy, according to Dane Spealman, a State Farm insurance agent. However, the rate you pay for coverage, or your premium, will increase. The older you are, the higher your premium will be.

The amount you convert will also impact your premium. You can choose to convert the full value of a term policy or just a portion of it. For example, if you have a $500,000 death benefit, you could opt to convert only $250,000 of it to a permanent policy. You will pay less for a permanent policy with a smaller benefit, and the premium on the remaining term life policy will drop because the benefit has been reduced.

The type of permanent policy you choose to convert your term policy to will also factor into your premium. For example, the premium for a whole life insurance policy will be higher than the premium for a universal life insurance policy.

When you convert might also affect your rate. For example, State Farm gives term life policyholders a credit for the amount they've paid toward their policy that can be applied to the cost of a permanent policy if they convert within the first few years of getting a policy.

A healthy 30-year-old male purchased a $500,000 25-year term life insurance policy for $25 per month. At age 50, he decides to convert $100,000 to a whole life insurance policy. The cost of his new whole life policy is $118 per month. His current term policy has five years left of the 25-year term, and the face amount drops to $400,000, which lowers his monthly premium from $25 to $22. He now owns two life insurance policies. A $400,000 term life insurance policy with five years of coverage left and a $100,000 whole life insurance policy. For the next five years, his total cost of life insurance is $140 per month. When the term policy expires, his monthly premium is reduced to $118.

Some providers charge a fee to convert a term life insurance policy to whole life insurance. Your provider will give you an estimate for this charge, which is often partially based on the amount being converted.

A conversion period in life insurance is the time frame during which a policyholder can convert a term life insurance policy to a permanent policy. The conversion period varies by company, with some privileges lasting the entire term length. Some companies will allow policyholders to convert at any point during the term of their policy. However, many will limit the conversion period. For example, the conversion period on a 20-year term policy might be limited to the first 10 years the policy is in force.

Frequently asked questions