A term life insurance policy only covers you for a specified period of time, depending on the term length you chose when you bought the policy. Most insurance companies offer 10, 15, 20 and 30 year term policy options. There may come a time in your life when you decide that a term policy is no longer sufficient for your life insurance needs, however you may no longer be insurable and able to obtain a new policy.
Most term life insurance policies automatically include a conversion option, which is the option to convert your term policy to a permanent life insurance policy, within policy specifications. The conversion option is a valuable addition for many reasons, and if you are in the market for a term life policy you should check to be sure your policy includes this option. Here we discuss some key points to help you understand how conversions work.
Insurance companies that provide the conversion option with their term policies will provide at least one permanent product to convert to. Usually it will be Universal Life or traditional Whole Life. Read about these types of insurance. Some companies allow conversion to any of their permanent products. Have your agent compile a list of options for you when you are considering making the switch.
It is important to note that insurance companies may change products over time, so a product that is available for conversion today may be discontinued in the future.
The conversion deadline will be listed in your policy, and this is the absolute deadline for converting your policy to a permanent plan. Most insurance companies do not offer a grace period on this deadline. If you intend to convert your term policy, allow plenty of time for the conversion paperwork and processing.
As you may have guessed, permanent life insurance is quite a bit more expensive than term life insurance. Traditional Whole Life is meant to provide coverage until age 100 or beyond, so it is understandable that it will be more expensive than a term policy. Depending on the type of policy converted to and the age at which converted, you may be paying several times more than you paid for your term policy.
Often people will want to know the exact price they will be paying if they convert their term policy to say, Universal Life in 10 years. Your agent will only be able to give you a rough estimate, because insurance companies are constantly changing their rates. The price for a 50 or 60 year old today will not be the same as a 50 or 60 year old 10 years from now.
The price that you will pay for your newly converted policy depends on the age at which you decide to make the conversion. The younger you are the less expensive it will be. This does not necessarily mean that you should jump the gun and convert your term policy too soon. Talk to your insurance agent and a financial advisor to be sure that a permanent policy is right for you before converting your policy.
If you are not quite ready to part with your term policy, but you want to take advantage of your conversion option, most insurance companies will allow you to convert only a portion of your coverage to permanent life insurance. There is generally a lower limit, such as $50,000, but this varies by company.
Real Life Example
Mr. Cooper applied for a term life insurance policy at age 62. He was approved at the preferred plus rating class for a $250,000, 10 year term life policy for which he paid $500.00 per year.
2 years later Mr. Cooper was diagnosed with major heart issues for which surgery was required. During this time, he realized that his 10 year term policy (now 2 years old) was no longer sufficient to protect his loved ones. Mr. Cooper applied to countless different insurance companies trying to get a new term policy, but was unable to be approved due to his recent heart problems.
He was ready to give up, but then remembered that his current term policy had a conversion option, which meant that he could convert all or part of his current policy to a permanent plan with no evidence of insurability. At age 64 he was still within his policy’s conversion period, so he set out exploring the products available by his company for conversion. After much deliberation, he settled on a partial conversion to a cash value Universal Life policy, to age 100 and beyond. He converted $100,000 worth of coverage and was able to maintain his preferred plus rating class. The pricing on his new policy was $2,400.00 per year.
Things to Remember
- Conversion rules and options differ from company to company.
- Permanent life insurance is very different from term life, so make sure you fully understand it before making a conversion.
- Often conversions are not reversible, so once done you can not convert back to your term policy.
- Find an experienced agent who is willing to go over all aspects of your new policy before conversion.