What is 'Convertible Insurance'

Convertible insurance is 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 on their convertible insurance, 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.

Why Purchase Convertible Insurance

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).

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