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 April 15, 2020

How Does Convertible Term Life Insurance Work?

convertible life insurance

What Is Life Insurance?

Even though it’s designed for a simple reason, life insurance can be confusing. Whole life, term life, group life insurance, convertibility – what does it all mean and how does it affect you? To understand how a term life insurance policy can be converted, let’s look into what term life insurance means and in what situation it would make sense for someone to convert their term life insurance to permanent life insurance.

What is Term Life Insurance?

Just as it sounds, term life insurance is purchased to provide coverage for a determined amount of time – 10, 15, or even 20 years. Term life differs from permanent or whole life insurance as that coverage stays with you for your whole life.

What is a Convertible Insurance Policy?

When we talk about convertible insurance policies, there are two different meanings:

  1. Converting from a group insurance policy to an individual policy
  2. Converting from one insurance policy to another insurance policy

Does Life Insurance Cover Accidental Death?

Whether you’re going from a group life insurance policy to an individual policy for yourself, or a term life insurance policy to a permanent life insurance policy, the appeal of converting is that you typically don’t have to go through the health qualification process again. If the conditions of the policy have been maintained and payments have been made on time, you may not need any new or additional screening at the time the policy is converted.

How Does Convertible Term Life Insurance Work?

Here’s an example of how converting from a term life insurance policy to a whole life insurance policy might look like:

Hector and his wife, Julia just recently had a baby. Knowing the importance of keeping his newborn daughter and wife financially protected, Hector purchases a convertible term life insurance policy for $250,000 for 15 years. Fast forward 14 years, Hector gets a letter saying his term life insurance policy is going to end after the year is up.

Hector speaks to Julia to consider their current situation. Even though their daughter is a few short years away from moving away to college, they recently purchased a bigger house so Julia’s mother could move. Her mother doesn’t have the greatest health, so Julia quit her job to watch after her.

Knowing that Julia, her mother, and their daughter will be financially dependent on Hector for at least the next five years, Hector decides he wants to go ahead and convert his term life insurance to whole life insurance. He likes the insurance company’s service and he wants to keep his family’s finances protected in case he passes away unexpectedly.

Hector calls his insurance agent and begins the process of converting his $250,000 of coverage into a whole life policy. His agent assures Hector his coverage will stay the same, but his premium will slightly increase because he will be protected for longer and he gets the cash value benefit. Hector doesn’t mind because one day, he plans on using the cash value to help pay for his daughter’s wedding.

Do I Need a Convertible Insurance Policy?

Just as any insurance, life insurance is not a one-size-fits-all. The type of life insurance coverage you purchase heavily depends on your current life snapshot – who do you provide for financially? Do you have any debt? Do you have final expense savings? What’s your health like? All of these questions help you understand your need for coverage now and in the future.

Because your life grows and changes, life insurance should be considered and reconsidered at every stage in your life. While there are advantages and disadvantages of a convertible life insurance policy, the most useful feature is that may help you keep the same amount of coverage without undergoing the medical examination process in the future. Since a lot of things will change between now and the future, you may want to consider your current needs and find coverage that fits them.

Investopedia, Convertible Life Insurance, 2018

Categories: Insurance, Life Insurance, Term Life Insurance

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