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What Is Convertible Term Life Insurance?

Dec 08, 2020 4 min read Susanne Bassmann

Key takeaways

  • Convertible term insurance lets you “trade in” a temporary policy for a permanent one.
  • Converting can make sense if you want the benefits permanent life insurance offers.
  • Converting part of your policy can help you meet your goals and manage your budget.

 

Life insurance that lasts for a set period like 10, 15 or 20 years (known as term insurance) can be a great way to protect your loved ones at an affordable cost. But if you feel that you’ll need life insurance beyond that period, it could make sense to trade in a term policy for permanent coverage. Permanent insurance can last as long as you live—and offer other benefits. That usually makes it more expensive than term coverage. Yet depending on your needs and plans, it could be worth the extra cost.

Most term life insurance policies are convertible: They can be exchanged for, or converted to, permanent policies issued by the same insurance company. (The term policy will state whether it’s convertible, along with any time limits on making the move. If your policy doesn’t have this information, call the insurer or talk to a financial professional about your options.)

 

 

Should you convert a term policy to permanent?

Whether to convert depends on your situation and financial goals. Consider converting if you can afford the higher premiums and you want:

  • Coverage until you die. Permanent life insurance will pay money (called the death benefit) whenever you die, as long as you maintain the policy. By contrast, If you outlive term insurance, the policy—and the death benefit—goes away.
  • A set cost. Life insurance usually gets more expensive as you get older or your health changes. So, once you pass a certain age or develop certain health issues, the cost can become prohibitive. Converting to a permanent policy can help to protect or “lock in” your coverage (and cost).
  • The chance to build cash value. Permanent policies can build up money inside them—typically through underlying investments similar to mutual funds, stocks or bonds—and let you access that “cash value” later on. You do this by borrowing or withdrawing from the policy, which reduces the amount your beneficiaries will receive and, in some cases, could trigger taxes. But if you don’t touch the cash value, it could help pay for the policy itself or increase the amount your beneficiaries will get. So, learn more about permanent insurance.

 

Term or perm?

Answer these 8 questions to see if term or permanent insurance makes sense for you.

 

Benefits of convertible term life insurance

Policy details differ, but for most term conversions:

  • You can decide when the time is right. Term policies with a conversion option usually let you choose when to trade them in for permanent coverage. There might be restrictions, though, so be sure to check the details.
  • You can convert without needing another medical exam. In most cases, you won’t have to answer health questions—let alone have a full-fledged exam. If you develop health issues by the time you convert, that works to your advantage: Your premiums (payments) for the new policy will be based on your age when you convert but on your health when you bought the term policy. This can save you money.
  • You could get a premium credit. Some policies offer a credit toward your permanent policy’s first-year payment when you convert. This can ease the financial sting of moving from term to permanent. But think ahead: If you’re eligible for a conversion credit, be sure to ask what the new policy premium will be in the second year and thereafter.

 

Do you have to convert all of it?

Nope. As you consider your options, remember that if you want to keep some term insurance, you could convert just part of it to permanent. For example, if you have a $500,000 term policy, you could convert $250,000 and keep the other $250,000 in term insurance. Combining term and permanent insurance can make sense if, say, you want extra protection until your kids graduate from college but want to focus on other financial needs afterward.

 

Doesn’t term life insurance expire?

Yes and no. Technically, the policy’s term and set cost will expire, but you can continue coverage if you’re willing to pay more. Some policies are “renewable”—they can be extended, often one year at a time, until a certain age, like 90 or 95. Although you likely won’t need a medical exam to renew, the cost will increase because it will be based on your age at the time.

 

What you can do next

Read up on the benefits of permanent life insurance. Then, if you already have a term policy: Find out if it’s convertible and what, if any, limits apply. If you’re planning to buy term insurance and want to be able to convert it: Be sure to specify that you want convertible term. (If you’re buying term insurance online, read the details carefully to ensure it can be converted; some online policies can’t.)

To be sure you understand your options and costs, discuss your situation with a financial professional.

Footnotes

 

Susanne Bassmann has been writing for Prudential for over 24 years, helping various audiences understand the value of life insurance and financial products so they can live healthier financial lives.

 

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