Convertible term life insurance

Convertible term life insurance offers the best of both worlds. You can cover your short-term needs with the term life policy, and then make the switch to a permanent whole life policy if those needs change. While most insurers offer conversion features as a free add-on, there are a few caveats to this coverage.

What is a convertible term life insurance policy?

With a convertible term life insurance policy, you have the option to convert some or all of your term life coverage into a permanent policy, such as whole life insurance. You won’t need to requalify for coverage or undergo any additional health exams or screening — even if you’ve developed a health condition since you first got coverage.

How do convertible term life insurance policies work?

Most insurers will give you a time frame or age limit for life insurance conversion. Typically, you’ll need to convert your policy within five to ten years of purchasing coverage, or sometime between ages 60 and 75 — whatever comes first.

If you decide to upgrade your policy, you won’t need to provide evidence of insurability, which usually includes completing a health questionnaire or taking a medical exam. Instead, your insurer will use the rate class you were given when you originally bought your policy — which is great news if your health has declined since then.

Since permanent life insurance offers lifelong protection and has an investment component, your premiums will increase. But generally, you won’t pay anything to add the conversion option to your term life policy.

When is converting a term policy to permanent life insurance a good idea?

There are a few reasons why you might want to convert your term life insurance to a permanent policy. These include:

• Your dependents need a policy that doesn’t expire. If you now have a lifelong financial dependent, such as a child with special needs, a permanent policy can fund a trust and provide them with a safety net when you die.
• You’ve developed a serious health condition. When you convert a term life policy, you don’t need to undergo a medical exam. This is helpful if you’ve been diagnosed with a health condition that would raise your rates if you applied for a new policy and you know you’ll need more long term coverage.
• You want to turn your life insurance into a tangible asset. With permanent policies, part of your premium is invested to give your policy a cash value. This cash value grows tax-deferred, and once you’ve accumulated enough, you can take out loans against your own policy. When you die, your beneficiaries receive a death benefit. Term life policies only pay out a death benefit and don’t accumulate cash value. It can take years to build up the savings component, so keep that in mind when comparing investment channels.
• You’ve built a considerable estate. A permanent life insurance policy can help your beneficiaries to cover the estate taxes when you die.
• You can afford it. Maybe you wanted permanent life insurance, but couldn’t find room for it in your budget. If you’re in a better financial position, you could consider converting all or part of your policy.
• You want to guarantee your beneficiaries will get a payout. Chances are, you’ll outlive your term policy — which means your beneficiaries won’t collect a payout. If you convert to a permanent policy that lasts your whole life, the insurer will pay up eventually.

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Six things you should know about convertible term policies

There are a few things to keep in mind if you’re considering a convertible term policy:

1. You won’t need to take another medical exam. Since you already passed the first time, you don’t need to go through the underwriting process again. This is one of the main selling points of convertible policies.
2. There’s a deadline to convert. Generally, the conversion period starts two to five years after taking out a policy. Then, you can only convert your policy up to a certain time — usually before your 65th or 70th birthday. After that, you won’t have the option to upgrade to a permanent policy. The deadline varies between insurers, so be sure to read the fine print before purchasing a convertible policy.
3. You may be able to convert part of your policy. If your provider allows it, you can convert a portion of your term policy to a permanent policy, rather than the full face value. You’ll then own two separate policies. This is called a partial term conversion.
4. Your provider might limit your choice of permanent policies. Most providers will let you convert your term life insurance to any of their permanent policies. Others will restrict you to whole life.
5. You’ll probably pay a higher premium when you convert. Permanent policies are typically more expensive than term policies because they have an investment component and offer lifelong protection. But it might still be cheaper to convert than apply for a new permanent policy when your term ends.
6. You can use your original age when converting. To score lower premiums, you can ask your insurer to use the age you were when you first bought the policy when calculating your premiums. Your provider might require you to pay a lump sum at the time of conversion, though. If you want to use your current age — and avoid coughing up a lump sum of cash — convert your policy as soon as possible.

How much will it cost to convert my term life policy?

There’s no charge to convert your term life policy to a permanent policy. However, your premium will rise — possibly by hundreds of dollars per month. To give you an idea of the price difference, whole life insurance is often four to six times more expensive than term life insurance.

To incentivize you to convert your policy, your insurer may offer a “term conversion credit.” This credit will go towards your premiums for the first year, and the value of the credit is based on the face value of your policy.

There are a couple of caveats. The credit will be prorated for partial conversions, and might be lower if you convert your policy using an agent who works on commission.

How to convert your term life policy

When you’re ready to convert, double-check you’re within the conversion deadline. If you are, contact your life insurance company and they’ll walk you through the next steps. Generally, you’ll need to fill out some forms to confirm the conversion.

Can you convert part of your policy?

You can choose to convert part of your term life insurance coverage, in what’s called a partial term conversion. By doing this, you’ll end up with lower premiums and two separate life insurance policies.

Let’s say you’re looking to convert your $250,000 term life insurance policy. If you don’t want $250,000 in permanent coverage or the premiums are too expensive, you might decide to convert just $100,000.

So, you’ll have a $150,000 term life policy, and a $100,000 permanent policy. If you die, your beneficiaries will receive the death benefit from both policies. But if you outlive your term, you’ll still have coverage through your permanent policy.

Alternatives to a convertible term policy

If convertible term life insurance doesn’t fit your needs, you could explore these options:

• Annual renewable term life insurance. This is a one-year policy that your provider will renew each year for a set number of years. During that “insurability period,” you can renew your coverage annually without reapplying or taking another medical exam. Since you’re basically taking out a new policy each time, your rates will increase year-on-year.
• Decreasing term life insurance. With decreasing term life, your premium won’t change, but the death benefit gradually decreases over the life of the policy. This policy is popular among people who have less of a need for life insurance as time goes on. The terms range from one to 30 years.
• Laddering term policies. This strategy involves purchasing term policies of different lengths to align with your financial obligations. For example, if you have a 30-year mortgage and 5 years left on your student loans, you might take out a 30-year policy and a 5-year policy. By doing that, your family won’t be saddled with those debts if you die. And if you survive the terms, you would have hopefully paid them off.

Bottom line

A convertible life insurance policy allows you to make the most of low premiums now while knowing you’ll still qualify for permanent coverage later on — regardless of your health. Typically, you won’t pay extra for the conversion option, but you’ll want to double-check the deadline with your insurer, and ask which permanent policies you’ll be able to choose from.

While you’re researching, take the time to compare life insurance companies.

Frequently asked questions

• How do convertible term policies differ from annual renewable term life insurance?

  Both policies offer coverage for a set period of time, and pay out a guaranteed death benefit. But annual renewable term (ART) policies don’t let you switch from term life insurance to whole life coverage.

• What happens if I don't convert my term life policy?

  Your policy will expire when your term is up. If you still need coverage, you’ll have to purchase a new policy. If you die during the term, your beneficiaries will receive a guaranteed death benefit.

• What's the maximum age you can buy a term life policy?

  It depends on the provider. Most life insurance carriers will set the limit at age 80 or 85. But remember, if you want to be able to convert to a whole life policy, you’ll usually need to do that before age 65 and 70.