Convertible Term Life Insurance

A Convertible Term Life Insurance policy is a contract in which the policy holder is entitled to change or convert their policy to another form of insurance during the policy period under certain conditions. An important condition of this is that the policy needs to be current with its bills paid and in good standing. Usually no further underwriting is required to 'convert' a convertible term policy.

A term policy that is able to be changed or converted to another form of life insurance such as Universal or Whole Life with no further underwriting criteria is called a Convertible Term Policy. Certain criteria must generally be met in order to qualify to do this.   The following may be a list of criteria, although it can depend on the given insurer:

The last bullet here is just to point out that you if you already have a convertible term policy and wish to convert it, that you will want to check the contract language as all life insurance policies are different.

Some convertible policies allow you to convert the entire term coverage amount and others a partial amount. When in doubt ask.

A renewable policy is one in which the policy may be renewed once the term policy ends. The costs to do this after the term period are typically very high. Although if your are on your death bed, they could be considered a good deal.  Many people wrongly assume that renewable and convertible are the same thing - which they are not. Policies can be renewable and not convertible and in theory contracts could also be convertible but not renewable.

Another area of confusion with convertible policies is with the word portable.  A portable policy allows a group employee to buy or port "Group Life Insurance coverage when they are losing coverage because their coverage is being voluntarily or involuntarily terminated."  Porting is done through group life policies not individual life insurance policies. These are not the same.  Numerous restrictions surround the porting of a group life policy.

Convertible term insurance is terrific in many ways.  This site has argued numerous times against most people buying whole life insurance, however if the cost to buy a convertible policy is negligible than there may be no harm.  Here are some of the benefits of these policies.

There are not that many drawbacks.  The only negative is that it may end up costing our either slightly more money with a given carrier or by removing numerous carriers because these policies are harder to find.

All other things being equal if you can secure a convertible term policy for only a few dollars more per year, these insurance contracts might be a great option.

Convertible term life insurance with certain carriers is free.  With other insurers there may be a small cost, perhaps around $10 per year. Still others may charge far more.  In general though, asking how much it more it costs to purchase a convertible policy is missing the larger point.

There could in theory also be cost associated with the actual conversion once you want to do this. Please check the policy language of your contract for more details.

What is the most important consideration with Convertible policies?  There are two types of people that are considering convertibles:

The best methodology is to decide which person you are, the First or the Second.  Now read below.

If you are one of those individual consumers who fully plan on converting your term policy you should first start with an analysis of the type of Whole Life Insurance (or other) type of Policy that you will ultimately want. Purchasing any type of whole life insurance product will require an incredibly in depth evaluation of the insurer, their financial strength rating, their dividends paying history, their overall history, and their product.  In comparison to term insurance where you may be able to shop and purchase in two to three hours, whole life policies may take a few months to properly research.

Therefore if you are in this camp, I strongly encourage you to go find your future Whole Life Carrier and Chassis first, then look to see if a Convertible Term Policy is available. If it is not, keep shopping and repeat this process.

If you are only getting a Convertible Option because it can in theory help you, I would not spend too much time worrying about the actual company.  However it may make sense to confirm with the carrier that you are reviewing that they do indeed have a policy form that you are interested in.  As an example Banner Life Insurance has a convertible policy, but they only have a Universal Policy to convert it to.  If you only would want a Whole Life Policy, perhaps Ohio National may be a better option.

There are lots of good things about convertibles:

The decision of if you should or should not convert a convertible term life insurance policy is pretty complex.  The decision to make the purchase of the term stage is simple, but the reverse is true once you have to decide when and if to do it.  We will discuss this consideration in depth in a future article. However the same parameters concerning converting a policy that would be made are very similar to the parameters of buying a whole or universal policy.  In other words, what was important when you were deciding to buy a whole life policy would also be important when considering the actual conversion.

Basically your overall financial situation needs to be reviewed.  How much money you make, how are you saving all of your money.  Would the money that would be used to pay for this policy interfere with your qualified savings accounts such as Roth IRAs and 401Ks.  Do you need insurance for the rest of your life? Can you afford life insurance forever?

Convertibles are awesome if you can find them at a fair price.  All other things being equal I would suggest them most times.  The trouble with them is, that there are only a few of them that convert to whole life policies and are fairly priced.  In the end it makes good sense to consider them even if you do not see the advantages of them.

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