Convertible Term Life Insurance

Many, but not all, term insurance policies are “convertible”. A convertible term policy guarantees the policy owner the right to convert the policy, regardless of the insured’s insurability, into a permanent policy. In simpler terms, an insured who is currently uninsurable because of some recent medical problem can nonetheless convert his convertible term life insurance coverage and make it permanent without having to prove that he is still insurable. Case Study:

Mike and Judy Rodgers are young professional parents in their mid thirties. They have three children in elementary school, two cars and a nice home in a leafy suburb. Mike is 6 years into a 10 year convertible term policy when he is diagnosed with lymphoma. Suddenly, Mike is facing the specter of early mortality, and the attendant financial risks to his family. With only a few years remaining on his life insurance policy, and no possibility of purchasing new coverage, the family faces a possible financial disaster. Fortunately, because Mike’s policy is convertible, his agent arranges to convert the policy to permanent coverage. The new policy is issued by the carrier priced based on Mike’s current age, but using his original preferred health class. Mike doesn’t have to re-qualify for the coverage, doesn’t have to prove insurability, and doesn’t even have to pay the higher premiums faced by those with health conditions. By putting in place a policy that was convertible, he has preserved his original preferred health status, and guaranteed that his coverage will remain in place. (Of course, in our case study, Mike has a full recovery and lives to 120 when his great grand children collect the full value of his policy)

Here’s how it works:Most insurers will allow the policy owner to convert an existing term policy to any permanent policy they sell. A policy owner who wants convert existing term life insurance generally has two options:

  • an attained age term conversion, or
  • an original date term conversion.

Attained Age Term Conversion In an attained age term conversion, the policy owner simply exchanges his term life policy for a permanent life insurance policy at the insured’s age at the time of the conversion. For example, if a 35 year-old insured purchased term insurance and kept it for 10 years, he would be issued a new permanent policy with the premiums set as if it were a new policy purchased at age 45. There is generally no credit issued for the premiums paid on the term policy before the conversion. Original Date Term ConversionUnder an original date term conversion, the policy owner exchanges his term life insurance policy for a permanent life insurance policy issued at the insured’s age when the original policy was issued. The insured will be required to make a catchup payment to the insurer to put them in the same financial position that they would have been if he had been making the permanent policy premium payments from the beginning. This catchup payment can often be substantial, and serves as a deterrent to policyholders opting for original date term conversions. Continuing this example, if the 40 year-old ART insured had chosen to convert his term coverage The payment from the term insurance policy owner to the insurance company is usually the larger of the difference in a. reserves between the policies being exchanged, or the premiums paid for the term insurance compared to the premiums that would have been paid under the whole life insurance, plus interest less dividends. Because the policy reserves are approximately equal to cash value, the difference in reserves is approximately the difference between the whole life insurance policy’s cash value and the term life insurance policy’s cash value. As a general rule, a specific maximum age is stipulated, indicating that the conversion can occur any time before the insured reaches age 65, 70, or 85. Some policies require early conversion, such as during the first two years of the term policy, or up to three or five years before the policy’s original term ends. When considering buying term life insurance, the two main considerations, regardless of the specific application, are

  • will death protection alone meet the need?
  • will the coverage last as long as it is required?

As with any other decision about the appropriate type of coverage, the term life insurance product must match the need. A convertible term life insurance policy can be an effective tool that allows the insured to get a higher policy coverage at a low short term cost, and then convert it to a permanent policy when his income improves as his career advances.

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