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What is Convertible Term Life Insurance?

A convertible term life insurance policy is a term life insurance policy that allows you to convert to a permanent life insurance policy at a later date. 

A term insurance policy is sometimes called pure life insurance, because it offers a death benefit to your heirs, but only if you die within the term of the policy. For example, if you have a $100,000 policy over a twenty-year term, the only way your heirs get the money is if you die sometime during that twenty-year term. 

A permanent life insurance policy is one that lasts your entire life. It can be a whole life policy or a universal life policy; both have a savings component. 

A convertible term life insurance policy is different than a term policy—the option to convert has to be present when you buy the policy. You can’t just buy a term life insurance policy and then call your insurance company and say, “Please convert my policy now.” Most term policies are convertible, but make sure you know what your options are when you buy. 

Why would You Want to Convert a Term Policy to a Permanent Policy?

When people are just starting their careers, earnings tend to be lower. On the other hand, this is usually the time when families have small children who depend on them. Buying a convertible life insurance policy might be a good solution. Buying permanent life insurance may be cost-prohibitive, but later on when you have more money, you can convert your term insurance to a permanent policy. 

>>MORE: How Much does Term Life Insurance Cost?

Which Permanent Policy Should You Convert Your Term Life Policy To?

Many people often think that if they want to convert their term life policy, it means that they have to convert it to a whole life insurance policy. Whole life insurance is just one type of permanent policies, you actually have more options to choose from. Below are the highlights of each permanent policy and their benefits for your consideration:

  • Guaranteed Universal Life Insurance: Convert to guaranteed universal life insurance policy (or GUL) if you are only interested in death benefit coverage for your beneficiaries when you pass away. It is usually the cheapest permanent life insurance policy.
  • Indexed Universal Life Insurance: Convert to indexed universal life insurance policy (or IUL) if you are interested in maximizing both death coverage and retirement income. The cash value account in IUL will grow as the associated indexes, like S&P 500, grow, tax deferred. When you need to withdraw from the cash value account to supplement your retirement income, withdrawal is tax free.
  • Variable Universal Life Insurance: Convert to variable universal life insurance policy (or VUL) if you want to maximize your retirement income from a life insurance policy, tax free. Similar to indexed universal life policy, cash account value grows tax deferred and withdrawal is tax free. However, unlike indexed universal life policy with investment gain floor and ceiling limits, variable universal life policy allows you to fully benefit from investment gains.
  • Whole Life Insurance: Similar to indexed universal life and variable universal life, whole life insurance policy includes a cash value account. It is the only life insurance policy that guarantees both death coverage and cash value, despite being often modest compared to IUL or VUL. It is by far the most expensive life insurance policy. If you look for supplemental retirement income from a life insurance policy, whole life is not a good choice. If you are looking for guaranteed death coverage for your beneficiaries, whole life is also a bad choice. So, in most cases, whole life is a bad choice to convert to.

If you are looking to convert your term life policy to a permanent policy, you should look into either guaranteed universal life policy if you want to have guaranteed death coverage or indexed or variable universal policy if you include life insurance in your retirement plan.

Pros and Cons of Convertible Term Life Insurance Policies

Pros:

  • If you have special needs children or any other lifelong dependents, you’ll need insurance that lasts a lifetime so that they receive a death benefit when you die
  • No medical exam is required to convert, so if your health has deteriorated, you can purchase more insurance
  • As you earn more money, you can convert to a permanent policy
  • You want your heirs to get a tax-free death benefit
  • You can put your money in a tax-deferred savings account

Cons:

  • There’s usually a window you need to convert your policy within; somewhere between two and five years into the term, up to a certain time.
  • You can usually only convert to a whole life policy, although some companies may allow you to convert to a universal policy.
  • Premiums are higher for convertible term insurance than for term insurance. 
  • Premiums go up when you convert

As an example, let’s take Steve. Steve purchased a term life insurance policy for $100,000 for a twenty year term. He’s a business owner, and after five or six years, business really takes off. Alas, he develops a rare disease. Now that he has more money and more assets, he would like a permanent life insurance policy so he can leave money to his children. Since he bought a convertible term policy, he doesn’t need a medical exam, which is great because he might not qualify for another insurance policy once his term insurance is up. 

Keep in mind that you don’t have to convert to a permanent policy. You could continue on with your term insurance and then, when your term is over, either apply for another term policy or have enough money in other assets so that you don’t need life insurance. 

Why Should You Care About Convertible Term Life Insurance?

The short answer is because of insurability.

Some people might argue that that you don’t need to convert term life insurance. If you have had a term life insurance policy and now realize that you actually prefer a permanent life policy, you can just cancel your term life policy, ie. stop paying premiums, and buy a permanent life policy. Why do you need to convert?

When you realize you actually need a permanent life insurance, you are older and your health condition might not be as good as you were when you buy the term life policy. Buying a term life insurance policy when you were young is a very good decision since it helps lock in your insurability when you are young and in good health condition. When you get older and want to have a permanent life policy, you can just convert your term life with the same insurance company and don’t need to have another medical exam.

How is Convertible Term Life is Different from Renewable Term Insurance?

Sometimes insurance companies will offer renewable term insurance, but this is not the same as convertible term insurance. There are two types of renewable terms:

  • Annual renewable term: the policy renews every year at an increased premium. 
  • Renewable term insurance: you can get another term life insurance policy when the first one expires. 

Annual renewable term is usually short-term insurance. If you want to hang onto it, the policies premiums are similar to ten-year term insurance.

Renewable insurance just means you can get another policy. This may be less expensive, especially at first, but keep in mind that if and when you renew, you’ll be 10, 20, or 30 years older. Premiums will be much higher, even for term insurance. 

Shopping for Convertible Term Insurance

Since most term life insurance policies can be converted to permanent policies, you can shop for a policy with many different insurance companies. An efficient way to do that is through an online life insurance broker such as PolicyGenius or Quotacy or HealthIQ. When you enter your information, it will come back with quotes from up to ten companies. Policygenius said that all the term policy quotes they gave us came with an option to convert to permanent policies. 

Last Thoughts

You’ll go through many changes in your life, so your insurance should keep up. Converting a term life insurance policy to a permanent policy is an option to consider as you make more money and need tax-deferred investments. Be sure and read your policy carefully, and don’t be afraid to ask questions.

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