Many people struggle to understand how life insurance works. Between the magnitude of the decision and the pages of fine print, choosing a policy can be utterly overwhelming. While cost is the number one reason Americans cite for not buying life insurance, it would be safe to assume that complexity is an underlying factor.
Life insurance doesn’t have to be complicated or confusing. By learning the basics, you can feel confident in conversing with a life insurance agent about your needs and options. And when you do, there’s a good chance they’ll recommend a convertible term life insurance policy.
To understand what that means, you’ll first have to understand the two types of life insurance: term life and whole life:
What is Term Life Insurance?
Term life insurance is best described as pure protection. It provides a death benefit (money paid to your spouse or heirs to cover income loss and assets in the event of your death) at a fixed premium, for a set period of time (your term), with annual renewable terms.
Terms are generally available in 5-year increments ranging from 5 to 30 years, after which the policy will usually become renewable on an annual basis.
What is Whole Life Insurance?
Whole life insurance, also referred to as permanent life insurance, provides lifetime protection at fixed periodic premiums, and builds cash value in addition to your death benefit. There are many different types of whole life insurance, from indexed universal life policies embedded in stock market indexes to variable universal life, which is actually invested in the stock market.
The type of whole life insurance that we at JRC Insurance advocate is guaranteed universal life, a much safer investment than the volatile non-guaranteed policies that can increase in cost and deplete your cash value.
Advantages of Term Life Insurance
Whole life insurance is far more involved than term life. Like any investment, the cash accumulation account that comes with a whole life policy brings with it a market risk. And, the cash accumulation component is often mistaken for a death benefit—many people don’t realize that the money in this account is actually absorbed by the insurance company upon the insured’s death.
Furthermore, the complexity of whole life insurance yields a higher commission to the agent. This means that if an agent is pushing you toward whole life insurance, they might not have your best interests in mind.
Term life insurance, on the other hand, gives you the same coverage you seek in a whole life policy, without the “bells and whistles.” The benefits of term life insurance include:
- Affordable coverage
- Flexible options
- A fixed rate for a set period of time
- No startup costs
- No surrender charge
- No hidden fees
- The freedom to cancel or change your policy at any time
Unlike whole life insurance, term life insurance allows you to determine your current needs and seek coverage accordingly, without a set-in-stone commitment.
What is Convertible Term Life Insurance?
One of the biggest mistakes people make when buying term life insurance is not getting a policy that’s “convertible.”
Having a convertible term life insurance policy means that at any point during your term or before your 70th birthday (whichever comes first), you have the option to convert your term life coverage to permanent coverage. Convertibility keeps you from having to re-qualify if you decide to apply for permanent coverage.
Essentially, you’re choosing the affordable option now while clearing a path to the lifetime option in case your needs change during the term.
Why is Convertible Term Life Insurance So Important?
If your health begins to deteriorate during your term of coverage, the conversion option enables you to obtain permanent coverage when you might otherwise struggle to qualify for any coverage at all. With convertible term life insurance, you are entitled to convert to a permanent policy with no additional screening, regardless of your medical condition.
Let’s say Joe bought a 30-year term life insurance policy at age 40. Joe gets diagnosed with lung cancer at age 65. With his term winding down, Joe now needs a new life insurance policy.
Joe made the pivotal error of not asking his agent whether the policy he bought was convertible. Unfortunately, it turns out that Joe’s policy is not convertible, and because he is now a high-risk customer in the eyes of insurance companies, he will have an extremely difficult time qualifying for a new policy at an affordable rate—much less a whole life policy.
If Joe’s term life policy had been convertible, he would have been able to simply convert to a lifetime policy and ensure an adequate death benefit for his spouse or heirs.
The Difference Between Renewable and Convertible Term Life Insurance
While shopping for term life insurance, you’ll come across policies that are “renewable” in addition to those that are convertible. People commonly assume the two are synonymous, when indeed they’re not.
If a policy is renewable, it means that you can extend the same policy after your term ends. The problem with renewable policies is that the rates to renew are generally very costly—sometimes up to 500 percent higher within the first year. And even worse, if you don’t specifically cancel your policy at the end of your term, you might be billed the renewal rate unknowingly.
A convertible policy differs in that it gives you the ability to switch from term life insurance to whole life insurance. Renewable policies do not provide this option.
Nuances to Note
A term life policy either is or isn’t convertible, but not all convertible term life insurance is the same. Every policy has its own conversion rules. For example, some carriers set the maximum age for converting at 65, while others allow you to convert up until age 70. Some carriers just plain have higher conversion rates, and with any convertible policy, your options will be confined to the permanent plans that are eligible for conversion.
Also, understand that even when your policy is convertible, every year you wait to convert will drive up the conversion rate between 10 and 15 percent, because you will be moving into higher rate classes as you age. If you know you want to convert to permanent coverage, you’re better off doing it while you’re younger and in a lower rate class.
Work With an Independent Agent
Most importantly, you should work with an independent agent who can help you shop multiple insurance companies until you find the right policy at the right price. When you’re buying convertible term life insurance for the first time, you’ll want to make sure that you work with an agent with whom you can build a long-term working relationship. Click here to see why so many people choose JRC Insurance.