Converting Your Term Life Insurance into a Permanent Policy
If you have a term life insurance policy that is set to expire in the near future, you might be unsure of what to do next. Do you start shopping from scratch or see if your current carrier has some type of deal to offer you?
Either way, the one thing you don’t want is to be left without coverage.
Convertible term life insurance—as the name implies—provides the option to convert your current term life policy into a permanent policy that will last the rest of your life.
In this article, we’ll explain the basics of convertible term life for those who already have a convertible policy and for those who are buying term life insurance for the first time.
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How Does Convertible Term Life Insurance Work?
If you own term life insurance policy, you may able to transfer it into a permanent policy at any point during your term or before your 65th or 70th birthday (whichever comes first). Many term life insurance policies allow a “conversion option,” but every company is different, and some are more flexible than others.
The key benefit of convertible term life insurance is that you do not have to re-qualify or participate in additional screening if you decide to convert your policy to permanent coverage.
So, if your health begins to deteriorate during your term, the conversion option enables you to secure coverage that will ensure a death benefit for your loved ones regardless of how long you live. Without a conversion option, you might otherwise struggle to qualify for any coverage at all after your term life insurance expired.
Convertible vs. Renewable Term Life Insurance
Most people falsely assume convertible and “renewable” term life insurance are synonymous. They’re indeed similar but certainly not the same.
If a policy is renewable, it means that you can extend the same policy after your term ends. A convertible policy differs in that it gives you the ability to switch from term life insurance to whole life insurance. Most term life insurance policies offer both options and allow you to renew or convert your existing term insurance policy without a new medical exam or health screening.
Side by side, convertible and renewable term life insurance provide peace of mind for the worst-case scenario that you were to become terminally ill toward the end of your term. But keep in mind that renewable policies renew automatically—if you do not wish to renew, you need to proactively drop your coverage with your carrier.
Most life insurance companies will send you a notice 90 to 180 days before your policy’s guaranteed term ends, alerting you of the increasing cost to keep your policy active.
With a convertible term policy, your coverage ends if you do not take action to convert it so make sure you review your policy to verify the maximum conversion age. Most companies allow you to convert your policy anytime during your term or until the age of 70, but some life insurance policies do not allow conversion options after age 65.
What Situations are Best for Converting?
When you buy term life insurance, you’re probably buying it to insure some sort of debt—most often a mortgage—that would cause financial distress if you passed away. The idea is that you will pay down your debt over the years and no longer need the same coverage. But, many people without debt prefer to keep their life insurance policy for other reasons, such as final expenses, leaving an inheritance, protecting an estate, or simply enjoying retirement.
The primary use case for converting a term life policy into permanent coverage is when someone is uninsurable, meaning they have a severe health issue that is too high of a risk for insurers to take on. With convertible term life insurance, an uninsurable person has access to life insurance that will last their entire lifetime. They can convert with no additional medical exam or questioning and be placed into the same rate class as when they originally applied for their term policy.
For example, we recently had a client who was diagnosed with breast cancer named Sandy. Sandy was nearing the end of her term life coverage, and worried about leaving behind medical expenses to her family. With her recent diagnosis of cancer, she was unable to qualify for a new life insurance policy.
Sandy was able to keep her rate class of “preferred” even though it had been decades since she originally secured her policy and her health would no longer allow her to qualify for these rates. If she hadn’t been able to convert her policy, she would not have life insurance at all after her term ended. This would have forced her family to pay out any remaining debt and the cost of her final expenses.
However, she was still able to covert her existing term policy to permanent coverage. In fact, when you convert a term policy, you are able to keep your original approved rate class no matter how long it has been since you purchased your policy.
The Cost to Convert Seems High—What Should I Do?
In all honesty, the rates to convert a policy are typically very high, even with the rate class carryover. Permanent life insurance is flat-out more expensive than term life because the insurance company is guaranteeing a payout. Someone who is in good health at the end of their term would likely want to buy a new policy rather than convert. Nevertheless, it’s always good to have the extra option.
For someone who is in poor health, unfortunately converting your policy might be the only option available to you. If the rates are too high to convert your entire policy, you can convert a portion of it (a minimum of $100k face amount) and essentially pay the same for less coverage (not ideal, but again, good to have the option, and you’ll be able to keep this coverage for the rest of your life).
If you think you might want to convert your policy, don’t wait until the last minute. Rates typically rise by 10 to 15 percent each year as you age, and you want to be able to evaluate the cost of converting against other options (assuming you’re in decent health).
We recommend starting the conversation with your life insurance agent a few months before your term is up so that you don’t miss the opportunity to apply for other policies. And remember, just because you apply and are approved for a policy, doesn’t mean you have to buy it. Apply first, evaluate later.
I’m Buying My First Term Life Policy—Is It Convertible?
Let’s say Jack bought a 25-year term life insurance policy at age 40. At age 63, Jack is diagnosed with lung cancer. With his term life insurance winding down, Jack now needs an updated life insurance policy.
Jack made the pivotal error of not asking his agent whether the policy he bought was convertible. It turns out that Jack’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.
This hypothetical example happens in real life. While most term life insurance policies are convertible, it’s always good to confirm this with your agent. Also note that not all convertible term life policies are created equal. Every policy has its own conversion rules.
Some carriers set the maximum age for converting at 70, while others might drop it to 65. Some carriers have higher overall conversion rates, and with any convertible policy, your options will be confined to the permanent plans that are eligible for conversion.
Here are some well-known life insurance companies that we represent with a conversion option:
If you don’t see you company listed above, or if you have questions about your specific policy, please feel free to give us a call and one of our experienced agents will be happy to help. We can be reached toll-free at: 855-247-9555.
Let Us Help
Whether you’re mulling your conversion option or new to life insurance altogether, JRC Insurance Group can provide the expert, personalized guidance you’ve been looking for. If we took the time to write this article, imagine how much time we’ll put into helping you find the policy that’s right for your needs. Call us toll-free today at 855-247-9555, or click the button below to get an instant quote online.
Managing Partner and Co-founder
Cliff is a licensed life insurance agent and one of the owners of JRC Insurance Group. He has helped thousands of families of businesses with their life insurance needs since 2012 and specializes with applicants who are less than perfect health. In his spare time he enjoys spending time with family, traveling, and the great outdoors.