Term life insurance can help you provide your loved ones with a financial safety net during pivotal times in your life, like as your children grow older or after a change in your career. Terms usually last between 10 and 30 years; if you pass away during that time, your beneficiary receives a payout to replace your income, cover funeral expenses, or use for any other reason.
When your term ends, however, you’ll have options. Depending on the policy, you may be able to renew your term policy or convert it into permanent life insurance. Read on to learn how convertible policies work and whether they might fit your life insurance needs and budget.
Note: Fidelity Life does not currently offer convertible term life insurance policies. The following information is for educational purposes only.
How does a convertible term policy work?
A convertible term life policy allows the policyholder to exchange term coverage for permanent, providing loved ones with financial protection for your lifetime as long as premiums are paid.
When you first apply for a convertible term life policy, you complete an application that typically includes a medical exam. Then, insurers determine your eligibility and premium costs using public records and information like your age and lifestyle.
With convertible life insurance, you only have to complete the application process once (including the medical exam), even if you convert your policy. When you switch to permanent life, your premiums will change to the standard life insurance premiums for that policy for your age group at the time of conversion.
While some term policies may allow conversion at any point during the term, others may require you to convert your policy only within a specific timeframe, like the first ten years of a 30-year term. If you don’t convert your policy in that time, your coverage ends at the conclusion of your term.
Pros and cons of a convertible term life policy
There are several benefits of a convertible term life policy. However, convertible policies may not make sense for every situation, especially if you don’t need or want permanent coverage. Understanding the benefits and drawbacks of convertible term life insurance can help you make the best choice for you and your loved ones.
Benefits
- Consistent health rating: Your medical exam determines your “health rating,” a measure of your overall health status and lifestyle that impacts your premium costs. Typically, your health rating decreases over time as you face more complex health issues and lifestyle changes. However, you maintain the same health rating when you convert your term life policy to permanent life, so changes in your health won’t increase your premiums.
- Flexible conversion timeline: Conversion periods vary across policies, but you can convert at any point during that period. The timeline is up to you.
- Level premiums: After the initial increase to your monthly premiums when you convert your policy, your monthly cost remains the same indefinitely.
- Cash value: Permanent policies accrue cash value over time. If you convert your policy, you’ll begin building cash value that you can borrow from for emergencies during your lifetime.
- Lasting coverage: With permanent life insurance, you can take solace in knowing that your loved ones have coverage no matter when you pass away. If any loved ones depend on your income indefinitely, converting your term life policy to a permanent one can provide them with lasting financial security.
Drawbacks
- Increased cost: Term life insurance policies provide affordable coverage. If you convert your term life insurance policy to a permanent policy, your premiums could become five to fifteen times more expensive, depending on your age. While some convertible policies offer discounted premiums at the start of your permanent life policy, the change in cost could still be challenging to manage.
- Less flexibility: While convertible policies offer you the freedom to secure more permanent coverage, they also leave you with less flexibility. You may only be able to add specialized riders tailored to specific needs, like long-term care, or increase your coverage amount if you purchase a new policy.
When does it make sense to convert your term policy?
The right time to convert your term policy depends on your circumstances and the policy’s guidelines. If any of your loved ones or family members, like aging parents, become more financially dependent on you, you may want to consider converting to a permanent life policy so you can make sure they have coverage. However, before you switch, you might want to ensure your budget can accommodate the increased premium costs.
Your insurer may only allow you to convert your policy during a set “conversion period.” All insurance providers vary, but some standard conversion periods include:
- Within the first few years of your policy
- During the first ten or twenty years of your term
- Before you reach a certain age, like 70
- Before the policy’s fifth or tenth anniversary
- Before the end of the policy
Understanding your policy’s conversion period empowers you to take advantage of your convertible policy before it’s too late.
Convertible vs. renewable
Renewable term life insurance policies offer young, healthy adults flexible coverage but little security. Renewable life insurance terms usually last around one year; you could then renew them without completing another medical exam. However, as you age, your rates go up. Unlike convertible term life insurance, renewable policies can’t be extended or made permanent.
Partial conversion
Some convertible term life insurance policies allow you to convert only a portion of your term life insurance coverage to permanent life insurance. If you don’t need to maintain a large death benefit, you could save money by converting only as much coverage as you need. If you convert a portion of your term life insurance, you maintain two separate policies—term life and permanent life—until the term ends.
For example, suppose you have a $500,000 30-year term life policy to cover the mortgage, so your family can keep their home. Years later, after consistently paying on your mortgage, you may find that your child has complex needs and will rely on part of your income for care throughout their life. In that case, you might want a smaller permanent life insurance policy to provide your child with the funds for ongoing support. You could convert $250,000 to permanent life insurance and retain the remaining $250,000 term life policy until it expires at the end of the term. Ultimately, you’ll have the term coverage you need until your mortgage is paid, and you’ll also have peace of mind knowing your dependent child will be cared for if the unexpected happens to you at any age.
It’s worth noting that some convertible life insurance policies implement a minimum partial conversion, while others don’t allow any partial conversions.
Are all term life insurance policies convertible?
Many term life insurance policies include a clause that allows conversion to a permanent policy. If you already have term life insurance, you may want to check your policy’s conditions and guidelines to determine whether it includes a conversion clause. Otherwise, a licensed insurance agent can help you shop for the right policy.
If you’d like to extend your coverage but don’t want a permanent policy, you might consider term life insurance with renewal options. At Fidelity Life, many term life policies allow you to renew through age 95 without another application; premium costs only increase with age.
Let Fidelity Life help you find the right policy
While Fidelity Life doesn’t offer convertible term life insurance, a trusted licensed life insurance agent can help you identify policies that could meet your coverage needs. Fidelity life offers a variety of term and permanent policies without medical exam requirements. Call Fidelity Life today to learn more about your options, or get started with a quote online.