What is a convertible insurance policy?
Term life insurance is a policy that provides the insured person coverage for a certain period of time. On the other hand, a whole or universal policy is considered permanent, providing coverage for the entire life of the insured.
Convertible Term Policy
Now, a convertible term policy allows the insured to covert a term policy to a permanent policy at a later date. As long as the conditions of the policy have been maintained and payments made on time, the insured person is not required to undergo any new or additional screening at the time the policy is converted, regardless of his/her medical condition. This type of policy provides the benefit of obtaining less expensive term life insurance now while maintaining the option to convert to a permanent policy at a later date as insurance needs and financial resources change.
To learn more, read: Life Insurance: Putting a Price on Peace of Mind.
It is an insurance policy that can contractually be converted into another type of insurance policy at the same insurance company. The conversion privileges are stated in the policy and the exact policies that it can be converted into will be stated by the contract and insurance company.
Typically, convertible insurance deals with a level term insurance policy that can be converted into a permanent/cash value policy that may be some form of whole life or universal life. The contract will state how long that convertible options can be done (as example a 10 year level term policy may be convertible for all 10 years, but not after age 70, as example). One of the benefits of the convertibility is that although it gets converted at the age you convert it, you convert it at the same health rating as to when you applied for the policy. That is especially important if you are approaching the end of a conversion privilidage and you are not health.
That is one of the reasons that Term insurance is not just a commodity that you choose to lowest cost premium. If there is any possiblity that you could convert the policy, you want to know the conversion options before you choose the term insarunce policy/carrier.
I'll give you an example that is a composite of cases in my files.
Bob is 35 years old and needs life insurance for family protection. He wants to make sure his wife and kids are provided for if they tragically lose him. So he buys $2 million of a 20-year term, thinking that should be sufficient coverage until his youngest child is out of the house. He is young and healthy, so the premium is pretty low.
Now fast forward 15 years. He has a second mortgage, and two more kids. He realizes that he only has five years left on his premium guarantee, but certainly needs life insurance way past that point. But here's the kicker: he unfortunately had a heart attack last year, and a number of other serious medical complications. You wouldn't expect this in such a young guy, but these things happen. He wants to buy another term policy, but many carriers won't even touch him. The ones that are interested want to charge an arm and a leg.
Fortunately, his current term policy has a conversion privilege. He can switch to a permanent policy and lock in a guaranteed premium for the rest of his life. Best of all, he will not have to go through underwriting - the completion of a simple application will suffice for an approval. He will get charged the rate for someone his current age, but it will be at the original rate class. If he was approved at preferred non-smoker rates for his term insurance, he will be converted to a permanent policy at the same rate class.
In this situation, the term conversion is a real coverage-saver. Bob would basically be out of luck in getting a new policy because of health problems he didn't foresee down the road. The moral of the story is this: you cannot take your insurability for granted. God willing you stay healthy, but there is no guarantee. Start thinking about locking into rates on a long-term basis. The conversion privilege can help you do that.
A convertible Life Insurance Policy is a Term Policy that can potentially be converted into a Permanent Life Insurance Policy. The terms vary between companies, so make sure to work with a Trust financial planner to get the best coverage for your loved ones. Some "convertible" policy are sold by companies that don't actually offer permanent insurance, so there is nothing to covert to. Also convertibility period varies from company to company. The longer you have to convert the policy the better.
This is usually a term life insurance policy that allows the owner to convert the policy to a permanent life insurance policy within a specified period of time or by a certain age of the insured. The premiums will be calculated based on the age of the insured at the time of conversion and the type of permanent policy being issued. The original health rating the insured received with the term policy will be extended to the new policy without any underwriting requirements.
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