What Is Convertible Term Life Insurance?

In this article...
  • Find out what convertible term life insurance is and learn how it works. Explore the benefits of this type of policy to decide if it's the best choice for you.

Over time, your financial obligations change, and your insurance needs may differ as a result. Convertible term life lets you easily change your insurance coverage in the future so that it can continue to meet your needs. Choosing convertible term life insurance has many advantages, but this type of insurance isn't ideal for everyone. By getting to know the features of convertible life, you can make an informed decision when shopping for insurance.

What Is Convertible Term Life Insurance?

To understand what convertible term life insurance is, you first need to know the two basic categories of life insurance:

  • Term policies last for a set time period called the term. If you die during the term, your loved ones receive a death benefit. The policy expires at the end of the term and must be renewed or replaced with a new policy.
  • Permanent policies have no expiration date. If you keep making your premium payments, permanent insurance lasts until you die. Part of your premium payment goes to fund a cash value that grows over time.

A convertible term life insurance policy is term insurance with an expiration date and a conversion period. During the conversion period, you have the option to turn the term life insurance into a permanent life policy with the same death benefit. Your policy will then remain in effect until you die and begin accumulating a cash value.

What Can a Convertible Term Insurance Be Converted To?

Depending on the policy, you may be able to convert your term life to:

  • Whole life insurance, which has a fixed death benefit. Premium payments are normally fixed as well. However, some policies may let you use the cash value to pay premiums or only require you to pay premiums for a certain period before the policy is paid in full.
  • Universal life insurance, which lets you increase and decrease the size of your death benefit. Premium payments adjust each time you establish a new death benefit. Most policies also let you customize the size and timing of your premium payments.

How Many Times Can a Convertible Life Insurance Policy Be Converted?

Normally, you can only convert a life insurance policy once. Typically, after you have converted a term policy to permanent coverage, you wouldn't need to convert again.

What Are the Benefits of Convertible Term Life Insurance?

 Convertible term insurance offers many potential benefits, including a simplified underwriting process and less of a cash investment upfront. 

Simple Underwriting

If you have a standard term life policy, you'd need to apply for permanent insurance. The insurance company would usually put your application through a lengthy underwriting process. Typically, the insurer requires a medical exam to approve coverage. Depending on the findings of the underwriter, you could be denied coverage entirely. 

With convertible life insurance, the insurer guarantees that you can convert your policy, and the underwriting process is simplified. Normally, you won't be asked to undergo a physical. As a result, convertible term life insurance generally ensures that you can buy a permanent policy even if you develop a medical condition in the future.

Less Expense Upfront

Convertible term life insurance is generally less expensive than permanent insurance. If you can't afford large premium payments now, a convertible policy allows you to benefit from lower initial payments with the assurance that you can convert to permanent insurance when you have more money available.

Cash Value Accumulation

The cash value of a permanent life insurance policy can supplement your income in retirement, cover the cost of long-term care or be used to obtain a loan. A convertible term life insurance policy makes it possible for you to change your coverage to one that includes this benefit if you choose.

Flexibility for the Future

Term life insurance policies often last for long periods, and you may struggle to predict how your financial situation may change during that time. Convertible term life insurance gives you the flexibility to change your coverage in the future as needed.

What Are the Drawbacks of Convertible Term Life Insurance?

Convertible term life insurance does have some drawbacks that you need to know before you buy a policy.

Higher Premiums

The monthly premiums for convertible life are generally higher than standard term. If you never choose to convert your policy, you'll have paid more for coverage for no reason.

Increased Costs Post Conversion

With a convertible policy, you're guaranteed access to a permanent policy with the same benefit but not the same premium. You'll likely have to pay more following conversion because whole and universal life generally cost more than convertible term.

Limited Conversion Window

You have only a limited amount of time to convert your life insurance policy. After the conversion period ends, you're locked into your term policy. If you want permanent insurance in the future, you would go through the complete underwriting process.

Less Cash Accumulation

Permanent insurance policies build cash value with every premium payment. You won't begin to accumulate savings until you convert your term life insurance. As a result, you'll end up with less money saved than you would if you took out a permanent life insurance policy from the start.

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