If you’re trying to decide whether to apply for term or permanent life insurance, you may want to consider an option that offers additional flexibility: convertible term life insurance. Convertible term life insurance is a type of policy that allows you to convert your temporary term coverage into permanent life insurance without undergoing a new medical exam.
This conversion option typically has a predetermined time window and can be part of the basic policy or added as a rider. This type of policy allows you to obtain less expensive term coverage now and convert it to permanent coverage later while offering the same death benefit. In this article, we’ll describe how convertible term life insurance works and outline the advantages and disadvantages of this option.
Convertible Term Life Insurance Policy: What it Is and How it Works
A convertible level term policy works the same way as a traditional term policy in that it provides coverage for a specific period. However, it differs in that it has a provision or rider that allows you to convert it 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 period is typically determined when you purchase the policy, and if you don’t choose to convert the policy within that period, the option will expire.
When you’re ready to convert your policy, you can contact your insurance company to explore your options. You may also choose to convert part of the policy to permanent and have some remain as term coverage. For example, if you have a $500,000 policy, you could convert $250,000 to a permanent policy and leave the other half of the policy as term coverage.
Distinguishing Convertible Term from Traditional Term Life Insurance
Traditional term life insurance provides coverage for a specific period, typically ranging from 10 to 30 years. If you outlive the term, the policy simply expires, and there's no payout or retained value. In contrast, convertible term life insurance allows you to convert it to a permanent life insurance policy, such as universal or whole life insurance, without needing a new medical exam or going through a new underwriting process. This is particularly beneficial if your health has declined since you first bought the policy, as it ensures you can maintain coverage for the rest of your life, albeit at a higher premium. While convertible policies are initially a bit more expensive than traditional term policies due to this valuable conversion option, they offer flexibility for people who may want lifelong coverage later on but can't afford it now.
The Strategic Benefits of Converting Your Term Life Insurance
Converting your term life insurance policy to a permanent one can be a strategic financial move that provides long-term security and flexibility. Some of the benefits of converting your term life insurance include:
Securing Lifelong Coverage Without a New Medical Exam: One of the biggest advantages of a convertible policy is the ability to lock in coverage for the rest of your life without undergoing a new medical examination. This is especially valuable if you’ve developed health issues since you purchased the policy, as it allows you to bypass the underwriting process and avoid being denied coverage or facing higher premiums due to new health issues.
A Financial Safety Net for Evolving Needs and Health Changes: As life changes, so do your financial obligations. A permanent policy provides a financial safety net for the long haul, helping to cover things like final expenses, outstanding debts, and continued income for your loved ones. This becomes even more important as you age and your health may become less predictable, ensuring your family is protected regardless of what the future holds.
Using a Convertible Policy for Estate Planning and Wealth Transfer: Converting your term policy to a permanent one can be a powerful tool for estate planning. These policies build cash value over time and can be used to fund a variety of financial goals. The tax-free death benefit can also be used to transfer wealth to heirs, settle estate taxes, or leave a legacy to a favorite charity, making it a valuable component of a comprehensive wealth transfer strategy.
Cash Value as a Financial Asset
Converting your term life insurance policy into a permanent one brings a new consideration: the cash value. The cash value of a permanent life insurance policy is a savings component that accumulates over the life of the policy. A portion of each premium payment is allocated to this cash value, which grows over time on a tax-deferred basis. This feature makes it a "living benefit" that you can access while you're still alive. You can borrow against the accumulated cash value through a policy loan, which uses the cash value as collateral.
Pros and Cons of Convertible Term Life Insurance
If you’re debating whether convertible term life insurance is a good fit for you, you’ll want to weigh the pros and cons of this type of coverage. Some of the advantages of convertible term policies are:
Flexibility: Convertible term life insurance offers the flexibility to switch from temporary term coverage to permanent life insurance without undergoing a new health screening. This is especially beneficial if you experience health challenges during the duration of your term policy since it guarantees permanent coverage regardless of changes to your medical history.
Lower Initial Premiums: Convertible term policies generally have lower premiums than permanent life insurance policies. This allows individuals to obtain affordable coverage in the short term while keeping the option to convert to permanent coverage later.
Option for Lifelong Coverage: With convertible term life insurance, you have the option to secure temporary coverage now and convert it to a permanent policy in the future. This is particularly useful if you cannot afford permanent insurance at the moment but expect to be able to in the coming years.
While convertible term life insurance can be a great option for some policyholders, it’s important to consider the disadvantages of this type of coverage to determine if it’s right for you and your needs. Some cons of choosing a convertible term policy include:
Higher Premiums After Conversion: When you convert your term policy to permanent insurance, the premiums are likely to increase because permanent life insurance generally has higher premiums than term policies.
Limited Conversion Period: There’s usually a predetermined period during which you can convert your term policy to permanent coverage without a new health screening. This period varies by insurer but is usually before the term ends or before you reach age 70, whichever comes first. Once this period expires, you may no longer be able to convert your coverage.
Alternative Strategies
While converting a term policy is a valuable option, it's not the only one. Depending on your financial situation and needs, you might consider alternative strategies. One such approach is laddering life insurance policies. This involves purchasing multiple term policies of varying lengths and coverage amounts to align with your evolving financial obligations. For example, you might buy a 20-year term policy to cover your mortgage and a separate 10-year policy to ensure your children's education is funded. As each policy's term ends and a financial need diminishes, you're no longer paying for that coverage, which can be more cost-effective than a single, large policy.
Navigating these complex options can be challenging, but working with an experienced SelectQuote life insurance agent can help. They’ll work with you to help you make decisions about your coverage, from determining the right coverage amount, deciding whether to convert your policy or buy a new one, or developing a laddering strategy.
SelectQuote Can Answer Your Questions About Convertible Term Life Insurance
If you’re interested in a convertible term life insurance policy, we can help. At SelectQuote, our experienced licensed insurance agents will take the time to learn about your specific needs, priorities, and goals and then use that information to quickly gather quotes and plan details from a variety of life insurance carriers. We’ll take the guesswork out of the process to easily find the coverage that works best for you
