What is Convertible Insurance?

What is Convertible Insurance?

Convertible insurance is a form of life insurance in which the policyholder can convert a term policy into a whole or universal policy without having to go through the health qualification process again.

Convertible insurance allows the policyholder to convert a term policy, which only covers the insured individual for a set number of years, into an infinite policy, as long as the policyholder continues to pay the insurance premiums.

Key Takeaways

Convertible insurance is a term life insurance policy that can be changed into a whole or universal coverage without a medical exam.

This characteristic of convertible insurance ensures that an individual can acquire permanent coverage even if their health deteriorates at a later period but before the term policy runs out.

Convertible insurance will have higher premiums than regular term policies, and total premiums will rise more if and when the conversion is completed.

Understanding Convertible Insurance

If the policyholder agrees to convert their convertible insurance, the permanent policy will be equal in value to the term policy, but the premiums will be higher. Even before conversion, convertible insurance will cost more than a term life insurance policy for the same amount of coverage since there is an inherent cost for the ability to convert without a medical exam.

Advantages

The benefit of convertible insurance is that the policyholder does not have to go through the medical underwriting procedure again when switching from term to permanent. This is an invaluable feature. If the policyholder's health has deteriorated since they began the convertible term policy.

With convertible insurance, the policyholder just needs to pay their insurance premiums on time to keep the option of converting the policy from term to permanent.

Convertible insurance has both advantages and disadvantages.

You may pick a convertible term policy if you can only afford a lower-cost term policy now but believe you will prefer and be able to pay a higher-cost permanent policy later and do not want to risk losing life insurance coverage due to a change in your health status.

There are also more reasons to get a convertible insurance policy. For example, you may choose to convert from term to whole because you want to ensure that your dependents are financially secure after your death.

Whole life insurance contracts also have a cash value component, which grows through dividends. While it takes time to accumulate funds, the cash value component is an effective way to earn tax-deferred savings.

Disadvantages

Choosing convertible insurance does not guarantee that you will be able to obtain a permanent coverage for the same price as a term policy if you convert. Permanent insurance is usually more expensive than term insurance, regardless of other factors. Some insurance firms may take a lump-sum payment up front for customers who want to use their initial age for the conversion procedure in order to save on eventual premiums (rather than their acquired age at the time of conversion).

When acquiring a convertible insurance policy, make sure you understand when you may convert the policy (for example, every year on the policy renewal date) and when conversion is no longer allowed (for example, at age 65).

Most term life insurance contracts have a conversion deadline. Policyholders cannot convert their insurance plans after the deadline has passed.

Example of Convertible Insurance.

River bought a $100,000 convertible term life insurance policy for 30 years just after gaining her first job, and she has the option of converting part of or the full policy into a whole life insurance policy before she turns 50.

At the age of 40, after marriage and children, River reconsiders her attitude to life insurance and chooses to change her term policy to whole life. The premiums rise, but there is a cash value component that may be withdrawn while the insurance pays for her beneficiaries after death.