Convertible Insurance

What Is Convertible Insurance?

Convertible insurance is a type of life insurance that allows the policy owner to change a term policy into a whole or universal policy without going through the health qualification process again.

Convertible insurance lets the policy owner convert a term policy that only covers the insured individual for a predetermined number of years into a policy that covers that individual indefinitely, as long as the policyholder continues to pay the insurance premium.

Understanding 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 life 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. If the policyholder's health has declined since they started the convertible term policy, they will be able to obtain a permanent policy that they otherwise might not qualify for.

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

Advantages and Disadvantage of Convertible Insurance

Advantages

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.

There are also other reasons to purchase a convertible insurance policy. For example, you might want to convert from term to whole because you want to make sure that your dependents are taken care of financially, after your demise.

Whole life insurance policies also come with a cash value component that appreciates through dividends. While it takes time to build up savings, the cash value component is a useful avenue to generate tax-deferred savings.

Disadvantages

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. For those interested in using their original age for the conversion process in order to save on later premiums (as opposed to attained age at the time of conversion), some insurance companies will collect a lump-sum payment up-front to preserve that age calculation.

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); the point at which conversion is no longer allowed (for example, after age 65); 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 annual dividends).

Most term life insurance policies have a conversion deadline. Policyholders cannot convert their insurance policies, once the deadline has passed.

Example of Convertible Insurance

Immediately after getting her first job, River purchased a $100,000 convertible term life insurance policy for 30 years and has the option to convert part of or the entire policy into a whole life insurance policy before the age of 50.

After marriage and kids, at the age of 40, River rethinks the approach to life insurance and decides to convert her term policy to whole life insurance. The premium amounts increase, but there is a cash value component to withdraw even as the policy provides for her beneficiaries after death.