Most people boil life insurance down to two products, term life and whole life. But yet, there are many more options out there on the market and you can customize your life insurance policy any way you possibly imagine. There are permanent life insurance products out there that aren’t as expensive as whole life and don’t include investment aspect. There is also a variety of term life insurance policy that are highly customizable. One of the most popular is a term life plan that comes with an option to “convert.” This is commonly known as Convertible Term Life Insurance, Convertible Term, or Term Conversion Rider, let’s discuss what it is, how it works, and all your options.
In short, here is what you need to know about Convertible Term Life:
- Convertible term life insurance is a policy that comes with an add on that provides an option to convert to a permanent insurance at the term’s expiration or old age, whichever comes first.
- This usually comes standard with most term life insurance policies, at no extra cost. But always double check.
- You can convert the term life policy at any time during the term without proof of insurability. Meaning you won’t have to take another exam or go through the approval process, even if you’re ill.
- You can’t increase the coverage amount when you convert, unless you’re willing to prove insurability. However, you can decrease it.
- It can convert to a Whole Life, or Universal Life policy, depending on the company and product type.
- It’s a great option to afford the necessary amount of coverage for those that don’t have the funds to dish out for expensive permanent products.
- Alternatives include Renewable Term or Permanent Term.
- If you have a history of serious illness in the family, the Term Conversion Rider is a great option
That’s the gist of it, to compare quotes use the menu above, or our quoter here. Otherwise, let’s get into the detail of what this policy is all about.
What is Convertible Term and How Does it Work?
The Conversion Term Rider is an add on that comes with a Term Life policy. This add on allows you to convert your term policy to a permanent product without proof of insurability. The conversion has to take place as the term expires or before a certain age, usually between ages 65 to 75 depending on the company. At this point you would be guaranteed approval for the coverage, even if you were to contract a serious illness in the process, the life insurance company would give you coverage, simply adjusted to the new age. This means you would qualify for the same health rating you got at the inception of the policy.
Let’s use an example to clarify. If we take Joanna, a 30 year old who was able to get a 20 year term life insurance policy at the Preferred Rate health class. When she is 50, her term expires and she chooses to convert it to a permanent life insurance policy. Joanna is now older and developed Type 1 Diabetes. With Convertible Term Life Insurance, she can get a permanent policy, for the rate of a healthy 50 year old at the Preferred rate, without having to actually be a healthy 50 year old.
Normally, if she wanted a new permanent policy, she would have to take another medical exam, go through an underwriting process that will review her medical records and probably rated up, or declined for coverage. However, with the term conversion rider, she is guaranteed coverage at the initial health rating.
The only requirement is that you don’t try to increase the coverage amount. If you got a $500,000 term life policy, you can convert it to a $500,000 permanent policy. If you choose to increase coverage, you will have to prove insurability. The good news is, if your need for life insurance has decreased, such as kids growing up, or mortgage being paid off, you can decrease the coverage amount and have a more affordable rate.
What Does It Convert To?
When your term expires or you reach the required age limit to convert, you will be able to convert to a permanent product. The type of permanent product will depend on what the carrier has available at the time or on the agreement at the inception of the policy. Make sure to ask your agent about all the goodies that come with the product offer. Other than that, let’s break down two possible conversion outcomes for permanent products.
Whole Life
One conversion outcome is a Whole Life Insurance policy. This is the most popular permanent life insurance product and also the most expensive. It does provide an investment aspect in the form of cash value accumulation. A portion of your premium is dedicated to building up the cash value, which you can “borrow” down the line. If you live until the policy matures, you will get the entire coverage amount. This usually happens at age 100. The good news is, some companies will credit you for a portion of the premiums you paid into your term life insurance policy and carry it over when you decide to convert to assist the cash value accumulation.
Guaranteed Universal Life Insurance
A Guaranteed Universal Life Insurance policy is a more affordable permanent life insurance product because it doesn’t include the investment aspect of most permanent products. Traditional Universal Life and Whole life policies are more expensive due to the cash value accumulation attached to the premiums. The GUL policy is more pure protection and the little cash value it does accumulate, is normally just used to keep the premium level.
Who Should Get It?
Technically, it’s a great rider for anyone to have on their Term Life Insurance policy. However, if you currently need a certain amount of life insurance to protect your responsibilities, but don’t have the finances necessary to pay for the premium for a permanent policy, then the Convertible Term Life Insurance is a great option. This way you can take care of your temporary life insurance needs now and convert it to a permanent product down the line, adjusting the coverage amount according to your needs. Term life is a much more affordable option for those that don’t have the money to dish out for a much more expensive Whole Life policies. The option to convert allows you to lock in some life insurance until your finances improve, at which point you can convert to permanent.
How Much Does It Cost?
In the modern day, the term conversion rider is usually added on to every policy, free of cost! However, there are some companies that offer it as an add on that will increase your premium. Personally, I’d seek out a company that offers it along with any term product that you purchase.
Are There Other Options?
When it comes to Convertible Term alternatives you have a few options in the form of Renewable Term or Permanent Term products.
Renewable Term Life
Renewable term life insurance comes in two forms. The most common of these is Annual Renewable Term (ART). This is typical for most term life insurance policies that you buy. With an ART policy your coverage will renew annually at the point of expiration. The upside is it will renew on a guaranteed basis, meaning even if you’re ill, the coverage will renew, so you won’t have to take another exam or go through underwriting. The downside is that it will renew at the new age every year. So every year you get older, the policy will get more expensive. This can cause an astronomical monthly premium down the line.
The other type of renewable term is a little more rare. A few companies offer it and it provides an option to renew the term for another term period. This is also done on a guaranteed issue basis and adjusted to a new age, however, this doesn’t renew annually. For example, if your ten year term policy has expired, you will be able to renew for another 5 or 10 years.
Neither is really better than the convertible term, but it can offer a solution to those whose life insurance needs are really short term, like for a loan.
Permanent Term
Permanent Term insurance is the same product known as Guaranteed Universal Life Insurance. The reason it’s called “Permanent Term” is because, like term life insurance it is a pure protection life insurance product. But unlike term, it isn’t for a set period of time. Instead, this product “expires” at age 95 or all the way to 121, depending on the product. The reason I say “expires” and not expires, is because statistically speaking, you should be dead by then, so statistically speaking, it’s a permanent life insurance product even though it carries an expiration date. The upside to this product is that you can lock in a low rate at a younger age and not have to worry about rate increases down the line.
These are your two alternatives to a convertible term life insurance policy. It really comes down to your need and goals with a life insurance policy.
Considerations
When deciding on what is the best option for yourself, you want to consider a few things. First you have to determine what your needs for life insurance are. There are temporary responsibilities like a mortgage, paying off your kids college education or a business loan. And other permanent ones like final expenses associated with death, and legacy. Figuring this out can help decide what kind of policy you need. Other considerations for a convertible term policy include your family’s health history. If you have a history of serious illness in your family, then it’s a MUST that your policy includes a convertible term. And since most term policies include this for free, make sure whatever you’re being offered includes it.
Life insurance can be complex enough. With product types, coverage amounts, different companies and health risk, it can be difficult to navigate on your own. While it’s always a good idea to do your research, you should always work with a professional to do your life insurance shopping. Preferably an experienced independent agency. The independent status of an agency allows them to do the shopping on your behalf with multiple companies. Captive agents are those that only represent one life insurance carrier, and limit your options drastically.
Where to Get It?
The good news is you don’t have to search any further for an experienced independent agency that will guide you through the process. You’ve arrived! We work with all the A rated life insurance companies and mostly all term life insurance products that we offer come with the Term Conversion Rider at no extra cost. To compare rates simply use our quoter or give us a call at 888-492-1967. If you have any questions, hit the chat button below. Welcome to InsureChance!
