What Is Convertible Term Life Insurance?

Convertible life insurance policies are term life policies that can be changed to a whole life insurance policy or a universal life policy at any point during coverage. A term life policy only covers the policyholder for a specified time frame, like 10 years or even 40 years. Most term life policies are renewable, with a price increase, when a term ends. Permanent life insurance policies cover you for your entire life as long as you make premium payments but cost more.

A convertible term life policy allows the policyholder the option to change a term life policy into a permanent policy without time limits. Convertible term life insurance policies usually do not require a health test, and policyholders are guaranteed coverage even if their health deteriorates.

Policyholders should expect a rate increase if they convert their term life policy to a whole or universal policy but will typically pay less than buying a whole or universal policy without conversion.

Which Is More Expensive, Term or Permanent Life Insurance?

After converting a term life policy to a whole life or universal life policy, expect a premium increase. Term life insurance policies are always less expensive than whole and universal life policies; Permanent life insurance policies always cost more but they retain more value over time.

A convertible term life policy doesn’t require a medical exam to establish rates based on your health so it’s often cheaper than buying a permanent policy as you get older. For someone who is older or has a chronic illness, a convertible life insurance policy is a great way to get guaranteed coverage at a more reasonable price.

Policyholders should expect a rate increase if they convert their term life policy to a whole or universal policy.

Who Benefits From a Convertible Life Policy?

A convertible life insurance policy is right for you if you want to build a cash value with your policy without having to qualify with a health exam. Buying a convertible term life policy is perfect for people who anticipate a rise in income even though they can only afford a term policy now. Furthermore, a permanent policy will enable the policyholder to leave behind a greater sum to their beneficiaries after they pass.

Use your original age of insurance coverage to save on later premiums instead of using your age at the time of conversion to save money. In order to do this, your insurer may ask for a lump-sum payment to honor the request. You’ll still be saving despite this additional one-time premium.

Can You Convert a Convertible Term Life Insurance at Any Time?

Depending on your insurer, you may be able to convert annually up until a specified age, typically 65. It’s important not to wait too long to convert as you get older. It’s important to find out what your policy’s deadline is.

A convertible term life policy doesn’t require a medical exam.

Convertible Term Life Insurance Quotes

Which Type of Permanent Life Insurance Is Better, Whole or Universal Life Insurance?

Whole life and universal life are both permanent life insurance products. They differ slightly, as you can see below:

A whole life insurance policy

With a whole life policy, your beneficiaries will receive a death benefit after you die. As the name suggests, whole life insurance covers you for your whole life. Your coverage will be in effect so long as you continue paying your premiums, and you typically have until age 65 to turn your term policy into a whole life policy.

Once you have a whole life policy instituted, each time you pay your premiums, a portion of the premium is deposited into a separate savings account. Your cash value will generally grow tax-deferred and at a conservative but guaranteed rate (e.g., 2% annual growth). Some insurers will pay dividends, which can be pocketed, added to the policy's cash value or used to cover future premiums. Dividends are not guaranteed for the life of the policy, however.

After your policy accrues a minimum cash value, your insurer may allow you to borrow against it in the form of a loan. Repayment of the loan plus interest is required or the outstanding balance may be deducted from the cash payout to your beneficiaries after you die.

Age is usually a major determinant of how much your whole life insurance policy premiums will cost, perhaps less so with a convertible term policy.

A universal life policy

A universal life policy offers mostly lifelong permanent coverage and issues a death benefit to beneficiaries after your death as long as you continue paying your premiums until you pass. Unlike whole life insurance, you have premium flexibility and can increase or decrease your premium payment within limits. A larger premium will increase the cash value of your policy.

With a convertible life insurance policy, you typically have until age 65 to turn your term policy into a universal life policy.

Each time you make a premium payment with a universal life policy, a portion of that payment is deposited in a separate cash value account that accrues interest over time. The interest rate is generally low (e.g., 2% annual growth) but may be guaranteed by some insurers. Some insurers allow you to invest that cash value in market-based investment options to potentially increase your rate of return.

Once your cash value reaches a certain level, your insurer may allow you to use it to pay for your premiums. It’s important to make premium payments. Otherwise, your beneficiaries will not receive any cash payout when you die.

Just as with a whole life policy, after your policy accrues a minimum cash value, your insurer may allow you to borrow against it in the form of a loan. Repayment of the loan plus interest is required or the outstanding balance may be deducted from the cash payout to your beneficiaries after you die.

Unlike whole life insurance, universal life policyholders may have the option to invest their cash value in the stock market. This allows for a potentially higher rate of return for universal life insurance over whole life insurance. However, losses based on market conditions are also possible. These policies are best for investment-savvy policyholders.

Age is usually a major determinant of how much your whole life insurance policy premiums will cost, perhaps less so with a convertible term policy.

Benefits and Terms

Whole Life

Universal Life

 

Coverage Period

Lifelong coverage

Lifelong coverage

 

Flexible Premiums

Not flexible

Can increase/decrease within limits

 

Cash Value Growth

Lower, but guaranteed interest rate

Minimum guaranteed interest rate that may increase based on market performance

 

Cost

More expensive than term life

More expensive than term life

 

A convertible life insurance policy is right for you if you want to build a cash value with your policy one day.

Convertible Term Life Insurance FAQs

Which is more expensive, buying whole life insurance directly or converting a term life policy?

If your health has deteriorated, convertible term life insurance allows you to switch to a whole life policy without a health exam. If you buy a whole life directly, your poor health will make it more expensive.

Does a Convertible Term Life Policy Accrue Cash Value?

Your convertible term life policy begins to gain cash value after you convert it to a whole life policy.

Key Takeaways

  • Convertible term life insurance can be turned into a permanent life policy without a health exam.
  • If you’re restricted by your current income but see income growth in your future, buying a convertible term life insurance policy may help you meet your goals down the line.
  •  Converting a term life policy to a permanent life policy means lifelong coverage as long as you pay the monthly premiums.

Regardless of what type of policy you decide to buy, compare life insurance rates for the best prices available. Start by entering your zip code below.

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