DEFINITION of 'Convertible Insurance'

A type of life insurance that allows the policyholder to change a term policy into a whole or universal policy without going through the health qualification process again. Convertible insurance lets the insured convert a policy that only covers the policyholder’s beneficiaries for a predetermined number of years into a policy that covers the policyholders beneficiaries indefinitely, as long as the policyholder continues to pay the premiums.

BREAKING DOWN 'Convertible Insurance'

If the policyholder decides to make the conversion, the permanent policy will have the same value as the term policy, but the permanent policy will have higher premiums. Even before conversion, convertible insurance will be more expensive than a term insurance policy for the same amount of coverage because there is a built-in cost for the option of being able to make the conversion without a medical exam.

The benefit of convertible insurance is that the policyholder doesn’t have to go through the medical underwriting process again to switch the policy from term to permanent.  This is a valuable feature because if the policyholder’s health has declined since he or she took out the convertible term policy, he or she will be able to obtain a permanent policy that he or she otherwise might not qualify for. With convertible insurance, the policyholder only needs to pay his or her insurance premiums on time to retain the option of converting the policy from term to permanent.

You might choose a convertible term policy if you can only afford a less expensive term policy now, but think you might prefer and be able to afford a more expensive permanent policy later and don’t want to take the risk that a change in your health could disqualify you from life insurance coverage. Choosing convertible insurance doesn’t mean that you’ll be able to get a permanent policy for the same price as a term policy if you make the conversion; all else being equal, permanent insurance is always more expensive than term insurance because it presents a greater risk to the insurance company.  

When purchasing a convertible insurance policy, make sure you understand when you can convert the policy (for example, each year on the policy renewal date), at what point conversion is no longer allowed (for example, after age 65 or after age 75), and the features of the permanent policy (for example, how much savings it lets you accumulate, how you can invest those savings and whether the policy pays dividends).

  1. Term Life Insurance

    A policy with a set duration limit on the coverage period instead ...
  2. Conversion Privilege

    Conversion privilege is an insurance policy in which the insurer ...
  3. Universal Life Insurance

    A type of flexible permanent life insurance offering the low-cost ...
  4. Variable Life Insurance Policy

    A form of permanent life insurance, Variable life insurance provides ...
  5. Equity-Indexed Universal Life Insurance

    A permanent life insurance policy that allows policyholders to ...
  6. Yearly Renewable Group Term Insurance ...

    A type of insurance policy purchased by employers to cover several ...
Related Articles
  1. Insurance

    Selecting a Level Term Life Insurance Policy

    Deciding which level term policy is best for you can be challenging and should be approached with many factors in mind, not just cost.
  2. Insurance

    Should You Buy Term or Permanent Life Insurance?

    When choosing between term or permanent life insurance you'll need to consider these factors.
  3. Financial Advisor

    Getting Life Insurance in Your 20s Pays Off

    Find out how Americans in their 20s can benefit from a well-thought-out life insurance policy, especially if they are able to build cash value for retirement.
  4. Retirement

    Understanding Different Types of Life Insurance

    Understand the various types of life insurance, how each can be used in personal or business financial planning, and for whom they are best-suited.
  5. Financial Advisor

    Permanent Life Policies: Whole vs. Universal

    If you're looking for life-long security, choosing between these whole and universal life policies is a key decision.
  6. Financial Advisor

    7 Issues to Consider When Determining Life Insurance Coverage

    Seven issues to consider when buying life insurance to ensure the coverage is tailored to meet your personal financial situation.
  7. Insurance

    5 Mistakes That Can Ruin Your Life (Insurance)

    There are many reasons why it's important to have the right amount life insurance. Don't let these simple errors leave you unprotected.
  8. Insurance

    Life Insurance: putting a Price on Peace of Mind

    Would your death leave loved ones financially stranded? Find out how to ease your mind and keep them protected.
  9. Insurance

    Is Loan Protection Insurance Right For You?

    Loan protection insurance can keep you from defaulting on your loans when you're in financial trouble, but it's not for everyone.
  10. Insurance

    Term Life Insurance: Everything You Need to Know

    Term life insurance is an affordable way to financially protect your loved ones after your death. Here's what you need to know before purchasing a policy.
Hot Definitions
  1. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  2. Entrepreneur

    An Entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture. ...
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  5. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  6. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
Trading Center