Everything You Need To Know About Convertible Term Life Insurance

Learn about the benefits of convertible term life insurance with our guide.
By Mike Parker
Updated Aug 19, 2022
An elderly man who has just switched to a more permanent life insurance plan.
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Term life insurance policies that are convertible are a great option for people who want flexibility in their life insurance.

However, before you sign up for a convertible term life cover policy, it’s important to understand what they are, what they cost, and whether they’re right for you.

This article will cover convertible term life insurance policies and look at the benefits, costs, downsides, and other options to help you make a decision.

Term Life Insurance

To understand how convertible term life insurance works, it is important to first learn about the different types of life insurance policies available. 

Term life insurance offers temporary life coverage, typically for a set period of time (5, 10, 15, or 20 years). This type of life insurance can be useful if you only need life insurance for a fixed period. 

There are multiple types of term life insurance you can buy, including:

Level Term Insurance: This offers consistent life coverage for a set period of time. The death benefit amount remains the same throughout your coverage period.

Decreasing Term Insurance: This provides level life coverage for a set period of time, with the payout amount (or death benefit) decreasing over time. 

Increasing Term Insurance: This type of life insurance offers level life coverage for a set period of time, with the payout amount increasing over time. 

Annual Renewable Term Insurance: Offers life coverage for a year at a time, with the death benefit or payout amount typically remaining fixed. 

Permanent Life Insurance

Permanent life insurance is life coverage that remains in place until you die and will only end if you terminate your contract or stop paying premiums.

There are also different types of permanent life insurance you can buy, such as:

Whole life insurance:  As the name suggests, this life insurance policy covers you for your entire life. These plans offer a cash value account and the terms are fixed for the rest of your life.

Universal life insurance: This type of life insurance offers flexibility in how much you pay in premiums and when you pay it. With universal life insurance, you can even reduce your coverage to lower your premium payments.

Variable life insurance: This type of life insurance policy also offers cash value, but it is invested in an interest-bearing account or stock market-based investments. 

Indexed variable life insurance: This type of life insurance policy offers cash value that is linked to the performance of a stock market index, such as the S&P 500 or Nasdaq.

They also have additional benefits such as cash value that you can borrow against or withdraw. If you’re interested in learning more about term and permanent life cover, read our articles on term life cover, permanent life cover, and how they compare.

A woman researching between Term and Permanent Life Insurance.

Source: Pexels

What Is a Convertible Term Policy?

Convertible term life insurance is a type of life insurance that allows policyholders to convert their coverage into permanent life cover.

Unlike other types of term life insurance, convertible term life insurance offers policyholders the option of switching to a permanent life insurance plan at any point in their term life contract.

Convertible term life insurance is usually a level term insurance plan which can be converted into a whole or universal life policy.

How Does Convertible Term Life Insurance Work?

Convertible term plans work the same as other term life insurance plans in that you’ll be required to pay monthly premiums in exchange for coverage over a set period. If you die during your coverage term, your beneficiaries will receive the death benefit. 

You can convert your term plan into a permanent life policy:

  • At any time during your term contract.

  • At the end of your term life insurance policy.

If you decide to convert your policy, you'll be able to choose the type of permanent life insurance you're converting to, and you'll be able to select a new face value for your permanent life contract.

What Is the Face Value of a Life Insurance Contract?

The face value of life insurance is the amount that your beneficiaries will receive in the event of your death. It is also known as the death benefit.

However, your insurance company may only offer conversions to either a whole life plan or a universal life plan, so it’s important to check your contract details before signing up. If you’d like to learn more about how convertible term insurance works, speak to one of our agents to get personalized assistance over the phone. 

The Difference Between Renewable and Convertible Term Life Policies

While renewable and convertible term plans both extend your life insurance, they do so in different ways.

With a renewable plan, you will be renewing your term life cover for another period, while convertible life insurance converts your term policy into a whole life insurance policy. 

For example, let's say a person has a 20-year term life insurance plan. If the plan is renewable, they will have the option to renew their life insurance policy for another 20 years. 

Alternatively, if the life insurance plan was convertible, they will have the option of changing their coverage into a whole or universal life policy that doesn't expire.

Both options are likely to cost you more. However, with convertible term life cover, there are additional benefits to keep in mind if you’re considering getting a convertible term plan.

A man researching the difference between Renewable and Convertible Term Life Policies.

Source: Pexels

Why You Should Consider Convertible Term Life Insurance

A convertible term life insurance policy is a good option for people who want the flexibility to convert their life insurance policy into a permanent life insurance policy in the future. 

Convertible term life insurance typically costs more than non-convertible plans and this is something you should keep in mind before changing your policy type.

However, convertible term life plans can be useful if you decide at a later stage that you'd like to convert your life insurance policy to a permanent life insurance policy. 

Benefits of Convertible Term Life 

Convertible term life offers many benefits that make it open to a variety of different people in different situations. 

Here are some of the advantages:

More Choice: Buying a convertible term life plan gives you the option of converting your life coverage whenever it suits you. While these policies may cost more than regular term life insurance, the extra cost is worth it for the flexibility that comes with having this kind of coverage.

Premium Credits: Another benefit of convertible life insurance is that it allows you to earn premium credits which can then be used to reduce the cost of your permanent life policy.

What Are Premium Credits?

Premium credits, also known as term conversion credits, are a discount that some life insurance companies offer when you convert a term life plan into a permanent policy. These credits can help lower the costs of your premiums temporarily.

It’s faster than getting a new permanent policy: With a convertible term life policy, life insurance companies don’t require a medical exam or underwriting. This makes them an attractive option for those who may have pre-existing health conditions or bad credit.

Less expensive than permanent life cover:  Premiums for convertible life insurance are typically more expensive than those for regular term life insurance. However, they're still generally less expensive than if you were to get a permanent policy over the same coverage period.

This makes them ideal for people who don't have the means to buy permanent insurance now but may want to convert their life coverage at a later date.

Builds cash value:  Convertible life insurance policies also have the added benefit of building cash value over time. This cash value provides an extra layer of financial security for policyholders who can use it as loan collateral or as an emergency fund.

Flexibility: With convertible life insurance, you don’t have to convert your entire policy. You can choose the amount of coverage you would like to convert and keep a portion of your term life insurance by renewing your term cover.

A woman who is researching the benefits of Convertible Term Life Insurance.

Source: Pexels

Who Should Consider Convertible Term Insurance?

In some cases, convertible term life insurance can offer flexibility if you're confronted with life-changing events or unique situations.

Here are some examples of when convertible life insurance is a good option:

  • If you are the caregiver or parent of a child who will need ongoing care as an adult.

  • If your partner or spouse doesn't work and you're worried about their personal finances when you die.

  • If you suffer from a chronic condition or disease that makes it difficult for you to qualify for permanent life insurance right now.

  • If you want to provide your family with money to cover estate taxes and transfer costs after you die but can’t afford a permanent policy.

The Cost of Convertible Term Life Insurance

There are two costs you should consider when determining whether convertible term life is right for you. These are:

  • The cost you'll pay now.

  • The cost you’ll pay when you convert your policy to a permanent life plan.

In some cases, your term insurance provider may include a convertible term life clause in your contract for free. However, most insurance companies will charge a higher monthly premium for convertible term plans.

If you already have a convertible term life insurance plan and are considering whether or not to convert it to a permanent life insurance policy, you should be aware that your monthly premiums will increase.

Permanent life insurance is more expensive than term life cover and your monthly premiums are calculated based on current rates for permanent coverage.

However, there are some things you can do to lessen the financial costs associated with converting your term policy.

These include:

  • Using credits from your term life insurance policy to temporarily lower your monthly premiums.

  • Partially converting your term policy to reduce the overall costs of your permanent life cover and your monthly premiums.

Overall, convertible life insurance policies are a good option if you're interested in converting your policy to permanent life insurance at some point in the future. It can also be a cost-effective way to get the coverage you need. 

However, keep the costs we've covered in mind before you decide whether or not a convertible term plan is right for you.

A man looking at the costs of Convertible Term Life Insurance.

Source: Pexels

Why Convert My Term Plan to a Permanent Policy Instead of Starting a New Plan

If you're like most people, you probably signed up for a term life insurance policy when you were younger and healthy. Now that you're older, your health has changed and you might be looking at your life insurance needs differently.

There are a couple of reasons why convertible life insurance is often a better option than signing up for a new permanent policy.

  • Convertible policies typically offer more flexibility and options than typical permanent policies. For example, with a convertible term plan, you can decide when you want to convert your policy and choose how much coverage you'd like to convert.  

  • Convertible term plans often have lower premiums overall compared to permanent policies. This is because the death benefit of a convertible policy is usually lower than that of a permanent policy. 

  • If you have a convertible policy, your health or age won't be a factor in your application. With a new permanent life plan, you typically have to meet certain eligibility requirements in order to qualify.

Overall, convertible life insurance may be the better choice if you're looking to find a balance between affordability and coverage flexibility. 

A person converting their Term Plan to a Permanent Policy.

Source: Pexels

Where Can I Learn More about Life Insurance?

Convertible term life insurance is ideal for people who want the possibility of switching to a permanent policy later on but don’t want to go through a medical exam or underwriting.

If you’re interested in learning more about life insurance, coverage, and costs, visit our Life Insurance Hub today.

If you want to find out what convertible term life insurance policies are available in your area, or if you can get one through a specific life insurance company, reach out to our team of life insurance agents to discuss your options.