Convertible Term Life Insurance

Convertible Term Life Insurance

A convertible term life insurance, also known as convertible term assurance, is a term life insurance plan with a “conversion feature”. Using the term conversion option, the policyholder can convert his term life insurance into permanent life insurance. By doing so, the insured doesn’t have to provide proof of good health at the time of conversion.

What Is Convertible Term Insurance?

Convertible term life insurance allows the policyholder to convert term life insurance into permanent life insurance without undergoing a new medical exam. The policy will then remain in effect until you pass away and accrue cash value that can be accessed during your lifetime.

The majority of term life policies purchased are “level term life insurance“, in which premiums and death benefits remain the same over the term. The convertible term policy works just like a level term policy, except that it can be converted to a permanent policy later. Even if you don’t elect to convert, your insurance policy will continue to protect you until the end of the term. 

In what policies can convertible term insurance be converted?

Using the convertible term insurance’s ‘conversion option,’ you can convert your term policy into the following two permanent policies:

  • Whole life insurance: A whole life policy has a fixed premium and death benefit, so you pay the same amount each year. As time passes, your convertible whole life insurance will accumulate a cash value that you can borrow against.
  • Universal life insurance: A universal life policy has flexible premiums, which means you can adjust your premiums and death benefit. The universal policy also builds a cash value that can be borrowed from while you are alive. Moreover, cash value earns interest, which helps you pay your premiums.

How does a convertible life insurance policy work?

A convertible term life insurance starts the same way as a term life policy with a set term, usually 10, 15, 20, or 30 years. If you die within the policy’s term, the death benefit is paid to your beneficiaries. However, if you live beyond the policy’s term, your coverage will end. 

While today, a term life insurance plan might meet your needs, those needs may change in the future. In your later years, you might have difficulty obtaining permanent life insurance due to your health status. When you have a convertible term assurance policy, you don’t have to worry about health issues. 

In a convertible policy, you wouldn’t be required to pass a health test to make the conversion since the company would keep your health rating as it was when the convertible term assurance was purchased.

Since permanent life insurance never expires and accumulates cash value, it tends to cost more than a convertible term policy. When you convert your policy, your premiums will probably increase because you are switching to permanent coverage. Your new permanent insurance rate is determined by the age at which you convert.

Example Of Convertible Term

Suppose a 30-year-old man purchases a 25-year convertible life insurance policy. At age 50, he decides to convert that policy into a permanent one. He will be charged a much higher insurance premium for term life insurance conversion into permanent insurance, but it includes a cash value and the option to withdraw it.

Instead of purchasing a new whole life or universal policy, why convert an existing term insurance policy?

The process of term life insurance conversion into a permanent policy is much easier than purchasing a new whole life or universal policy. 

Whenever you apply for new whole life or universal policy, you must undergo an underwriting process that requires medical exams and health information. When you are not in good health, it may be harder to obtain a permanent policy.  

In contrast, when you convert a policy, you won’t have to answer any health questions, and there is no physical exam. Your health rating will remain the same as when the policy first began. 

Additionally, in convertible term life insurance, you don’t have to pay any money to convert your term insurance policy to a permanent one.

Convertible term life insurance pros and cons

Pros of convertible term Assurance: 

The benefits of convertible insurance are numerous; here are a few of them:

  1. A Great Choice For Young Families

A convertible term insurance policy may be an appealing option for young families who cannot afford permanent life insurance now but wish to have it in the future. It is important to note that premium rates will increase if the policy is converted to permanent.

  1. No Medical Exam Is Required

A convertible term plan is an option to consider if you can only afford a term plan right now, but in the future, you may be able to afford a long-term plan but are uncertain about your health at that time. If you have undergone significant health changes, you don’t have to worry, as no medical examination is required for conversion.

  1. Cash Value

In term life policies, there is no cash value. All permanent policies have a cash value component that increases in value over time. If you wish to ensure the financial security of your dependents after your death, it may be beneficial to go for life insurance conversion from term to whole life.

Cons of convertible term Assurance:

While convertible term life insurance offers many benefits, there are also some drawbacks to be aware of before you buy one. Let’s have a look:

  1. An Increase In Premiums

Having convertible insurance doesn’t mean you can get a permanent policy for the same price as a term policy. Because permanent insurance premiums depend on your age when you convert your policy, they are always higher than term insurance rates.

  1. Reduced Cash Accumulation

In a permanent policy, each premium payment you make builds cash value. While in a convertible policy, you will not start accumulating savings until you convert your term life insurance to permanent. Consequently, you will save less money than if you purchase permanent life insurance straightaway.

  1. Limited Conversion Period

Converting your policy must be done within a certain period of time. If you don’t convert within that time, you’ll be locked into your term policy. Afterward, if you want permanent coverage, you would undergo the full underwriting process.

A convertible term life insurance policy can be converted how many times?

As a general rule, you can only convert a term policy to permanent coverage once; it won’t need to be converted again. 

However, converting a policy comes with certain limitations. It must be done before your term policy ends. Once a term policy has expired, convertible policies won’t be converted. 

Some companies also require you to convert at a certain age, usually between 65 and 70. Furthermore, if you wait too long to convert, the premiums for permanent life insurance will be higher as the cost is based on your age at the time of conversion.

The Bottom Line

Throughout your life, your needs and concerns will likely change, so it might be wise for you to select a life insurance plan that meets your future needs. Although convertible term life insurance comes with both advantages and disadvantages; yet, the best part is that there is no need to undergo fresh health checks.

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