Convertible Term Life Insurance: What Is It And How Does It Works?

Convertible Term Life Insurance: What Is It And How Does It Works?


With convertible term life insurance, you can convert it to permanent coverage without going through the underwriting procedure of the insurance provider.

With convertible term life insurance, you can convert it to permanent coverage without going through the underwriting procedure of the insurance provider.

Find out more about convertible term life insurance, how it functions, and whether it would be a wise decision for you in terms of life insurance.

Examples of Convertible Term Life Insurance and Their Definition

Term insurance and permanent life insurance are the two most common types of life insurance coverage. No matter how long you live, permanent life insurance is made to last a lifetime. Term insurance plans are intended to be used for a limited time period, typically 5 to 30 years or more. All policies often fall into one of these two categories.

Convertible term life insurance is one of these variants, allowing you to change your term insurance policy to a permanent life policy without undergoing a medical examination or health assessment.

Unlike term insurance, permanent life insurance has a cash value account that lowers your premiums as you get older. However, you might be able to use withdrawals or policy loans to get access to the money in the account.

Convertible term life insurance’s key benefit is that it allows you to buy a temporary policy that is less expensive than a permanent one while keeping the option open to convert to a permanent policy down the road. Additionally, the underwriting procedure, which includes health inquiries and maybe a medical exam, is waived. Based on the details you provided when applying for the term policy and your current age, your premium for the permanent coverage will be determined.

Young families that someday want the security of permanent life insurance but can’t currently afford the premiums may find convertible term coverage to be appropriate. Keep in mind that if the policy is changed to a permanent one, premium costs will increase.

Let’s imagine, for instance, that you require life insurance because you have young children but are unable to pay the higher premiums for permanent life insurance. You then purchase a 20-year term insurance policy with a conversion provision. Four years later, you change your term policy to a permanent one when your income has increased and you can now afford permanent life insurance.

How Term Convertible Insurance Operates

You can be given the choice to renew, convert to permanent life, or revoke coverage as the term of a convertible term policy expires. To convert the policy, however, you do not need to wait for it to expire, and in some circumstances, you should not.

Conversion of your term life insurance policy may be restricted by the insurance company, for example, only being permitted within the first 10 years of the policy or no later than your 65th birthday.

The conversion period, whose length depends on the type of term policy you have, must be used if you want to convert. Additionally, you have the option to convert a portion of the insurance to permanent protection. Check your insurance documentation for details on whether you can do this once or several times.

If you convert to permanent life insurance during this time, you won’t need to have a medical exam in order to be covered. Your age on the conversion date and your health at the time you applied for the term policy determine the premium rate for your new life insurance policy (not your current health).

Although there is no medical exam required to make this transition, you can still anticipate higher premiums. The cost of increasing cash value and the longer duration of coverage are reflected in the higher premiums you pay for permanent life insurance (in comparison to term coverage).

Is Convertible Term Life Insurance Necessary?

The justification for your life insurance may evolve over time. When your financial situation and insurance requirements change, convertible term life insurance gives you the flexibility to convert to permanent life insurance without having to undergo a medical exam.

In certain situations, you might wish to think about purchasing a convertible term insurance policy.

You Can’t Afford Permanent Coverage

If you want to have permanent insurance but are currently unable to afford it, you can lock in a rate with a term policy that has a conversion option based on your current health. You have the option to change some or all of the term coverage to permanent as your financial situation improves.

Your Debt Is Outstanding

When you have term life insurance, you may put more money toward paying off debt and protecting your loved ones from financial difficulty if you pass away while your policy is still in effect (relative to having a more expensive permanent policy). But what if you still owe money when your insurance coverage expires? Convertible term life insurance allows you to convert to permanent life insurance, ensuring that your dependents are always covered, regardless of when you pass away.

Do You Depend on Others?

A life insurance policy is probably necessary if you have dependents. However, having dependents might be costly, so you might only be able to afford term coverage. A term policy can offer the protection you require right away at a cost you can afford rather than waiting until your financial situation improves to receive permanent coverage.

A permanent policy is ideal if you have a lifetime dependency, such as a child with special needs. Convertible term insurance, however, can be your second-best option if you can’t afford one or the required level of coverage with a permanent policy. By doing this, you can purchase the life insurance you require at a price you can afford and convert it to permanent protection once your finances permit it.

main points

  • You can change your term policy into permanent life insurance coverage via a convertible term policy.
  • If you convert term life insurance (with a conversion provision) to permanent coverage, you won’t have to undergo a physical examination or respond to health-related inquiries.
  • You must convert your term policy within the conversion period if you want to move to permanent life insurance.
  • The cost of switching from term to permanent life insurance will increase.

Leave a Reply