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There's a saying for life insurance that goes: You pay for life insurance with your money, but you buy it with your health. A health exam is required for most life insurance policies, and you need to pass the exam to qualify for coverage. This might make it difficult to plan for the future. While you may be eligible for coverage now, it's impossible to know where your health will be many years down the road.
Fortunately, convertible term life insurance can help you keep your options open. Learn more about this life insurance type, including how it works and when it might make sense for your needs.
What Is Convertible Term Life Insurance?
A convertible term policy starts out like a regular term life insurance policy. It's temporary life insurance coverage with a set expiration date, such as 10, 15, 20 or 30 years. If you die within the coverage period, the policy will pay out the death benefit to your beneficiaries. If you outlive the coverage period, your coverage ends.
However, convertible term policies have an extra feature that lets you switch some (or all) of your coverage to permanent life insurance — coverage that could last your entire life and build cash value, as long as premiums are paid. More importantly, you wouldn't need to pass a health exam to make the conversion. Increases in coverage could be subject to new underwriting.
One of the primary benefits of convertible term life insurance is that it can help keep your options open. While a term life policy may be the right fit for you today, years later you may want to switch to permanent life insurance coverage. But your future state of health may prevent this switch. With convertible term life insurance, you don't have to worry about tomorrow.
A convertible term policy also lets you extend your coverage as it gets close to expiring. You can convert at any point while your term life policy is still active — even a few days before the expiration date, depending on the policy. Some companies will also let you convert partial amounts, so you don't have to convert your entire term life policy.
Your premium will probably increase when you convert your policy because you're switching to permanent coverage. Permanent life insurance generally costs more than term life insurance because it never expires — so long as you keep paying the premiums. The insurance company bases the price of your new permanent coverage on how old you are when you convert.
The good news is the company will keep your health rating the same. If you qualified for a health discount before, you'd keep that discount on your new permanent policy after the conversion, even if you develop health issues.
When Is Convertible Term Life a Good Fit?
Convertible term life insurance might make sense for someone who wants term life insurance now but might want permanent coverage in the future. Let's say you're a 20-something looking to buy your first life insurance policy. You may like the idea of permanent coverage, but you may only be able to afford term life insurance. With a convertible term policy, you can switch to permanent life insurance when you're ready — with no health exam.
This policy type may also be useful for someone who's worried about losing their coverage because of health problems. Let's say you're in your 40s and want a 10-year term life policy. Maybe you've qualified for a health discount. You're not sure if you'll still want coverage in 10 years, but you'd like to keep your options open. By choosing a convertible term policy, you could extend your coverage later — even if you develop health issues.
Finally, a convertible term policy may be useful for someone who wants to continue their coverage. Some people purchase term life insurance policies for coverage until retirement. But many also realize they would still like coverage once their terms expire. Convertible term policies allow people to switch to permanent coverage options when the time comes.
Any Special Considerations?
An insurance company may charge an extra fee for adding the convertibility feature, but this depends on the company. You may be paying more for a feature you may not use and will need to decide if the added flexibility is worth the cost.
Also, once you convert your coverage from term to permanent, you can't reverse the decision. If you realize the price of permanent is too much for your budget, you would need to buy a new policy to switch back to term, which may also mean passing a health exam.
Finally, if your health improves or you quit smoking after you buy a term policy, you may qualify for a lower rate by reapplying and going through the health exam again. A financial representative can help you decide on the best plan of action.
By making your term convertible, you could avoid gambling your life insurance coverage on a future health exam. It's entirely up to you whether you want to extend your coverage later.