Life Insurance Basics
Convertible term life insurance is a term life insurance policy that your client can convert into a permanent policy. Most term life insurance is convertible term life insurance.
The majority of life insurance shoppers purchase term life insurance, which lasts for a set period of time (usually between 10 and 30 years) before expiring.
Term life insurance is the best option for most people because as they get older, their financial obligations — such as paying off a mortgage or supporting children — usually decrease and life insurance coverage becomes less necessary.
Term life insurance is also the most affordable option, and it comes with few tax restrictions and fees.
But, as the end of your client's policy’s term approaches, they might find that they still need life insurance to provide a safety net for their beneficiaries. With convertible term life insurance, your client can convert their term policy to a whole life policy or other permanent policy that doesn’t expire.
How does a convertible life insurance policy work?
Each insurance company and policy has its own rules and requirements for term conversion, but in general, the convertibility rider includes these provisions:- Conversion period: This is the time frame when your client can convert their term policy to a permanent policy. Usually, they can convert before the term ends or before they turn 70, whichever comes first. With some other policies, your client can convert during the first 20 years of a 30-year policy, or before the policy’s tenth anniversary.
- Available products: There are many types of permanent policies. Your client's term conversion rider will include which ones are available to them to convert their policy to. Typical products include whole life insurance and universal life insurance
- Whether partial conversions are allowed: Some insurers allow policyholders to convert just part of their policy to permanent coverage. There’s usually a minimum amount that you can convert — often $50,000 to $100,000.
Questions or want to learn more?
Should your client consider convertible term life insurance?
Most term life insurance policies include a convertible term life insurance rider. It can be beneficial to understand how it works, and why your client might want to use it.
There are a number of reasons why your client might need to convert and extend their life insurance coverage past its original term.
When is convertible term life a good fit?
Making use of your client's policy is convertible term rider might be a good option for your client if:
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They expect people to still rely on their income after their term expires: If your client has a child with a disability or is providing for aging parents, they may need coverage beyond the initial term they purchased.
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They've taken on additional debts: If your client has taken on some unexpected debt that they don’t expect to pay off before their term expires, converting to a permanent policy can protect their family from that debt.
Does your client have to convert all of their term policy?
Insurance companies may offer partial conversions in cases where your client wants to extend their life insurance coverage but doesn’t need as large of a death benefit.
Say your client currently has a $500,000 term life insurance policy that they want to convert to a whole life policy.
The premiums on a $500,000 whole-life policy might be too expensive and your client might not need as much permanent life insurance coverage — so it might not make sense to convert the entire policy.
In this case, your client could opt for a partial conversion. For instance, if they choose to convert 50% of the policy, $250,000 of the policy would be converted to a whole-life policy, but the other $250,000 would remain an active term policy until the end of the term.
How to convert your life insurance policy
First, have your client contact their insurance company to confirm they have a convertible term life insurance policy and that they're within their policy’s conversion period. If your client purchased a convertible term policy through Policygenius, they can contact us for help, too.
Then, decide how much coverage your client needs (most companies offer partial conversions, so your client might not want to convert their entire policy).
Finally, your client will need to fill out some conversion forms with their insurer. They won’t have to go through underwriting or take a medical exam.
Converting to a permanent policy
If your client thinks they may want to convert their term policy to a permanent policy, they should read over their policy or check with their insurance company to confirm when their conversion period starts and ends.
How much it costs to convert a policy
When your client converts their term policy to a whole life policy, the conversion process itself won’t cost anything.
However, because permanent life insurance is usually around five to 15 times more expensive than term life insurance, your client should be prepared for their premiums to increase significantly after the conversion.
Although your client won’t have to go through underwriting again and risk a higher health class, their new premiums will be based on their age at the time of conversion.
They may be able to offset some of the costs of moving from term life to whole life by opting for a partial conversion, or taking advantage of any conversion credits their insurer offers.
Some companies offer a term conversion credit that reduces a policyholder's premiums for the first year of the conversion. Keep in mind that after the discount period, your client be charged the full amount for their new whole-life premiums.
Alternatives to life insurance conversion
If your client needs coverage for longer than their term life insurance policy will provide, but their policy isn’t convertible term life insurance or they can’t afford the new premiums, they have options.
Purchase a new term life insurance policy
Given the steep cost of whole-life insurance, it’s possible that taking out a new term policy at the end of your client's existing term will be a cheaper option than converting their policy.
Applying for a new policy will require going through the underwriting process again, but your client could potentially save themselves hundreds of dollars in premiums each year.
Their premiums will depend on their age, their health, and their new term length.
Your client should compare quotes well in advance to determine if buying a new term policy will be cheaper than converting their current policy — that way if it isn’t, your client still has time to convert.
Use the ladder strategy to “stack” term life insurance policies
Another option to explore if your client is seeking partial coverage is buying multiple term life insurance policies that expire at different times, known as the ladder strategy.
This method doesn’t involve policy conversion, but rather stacking, or laddering multiple term life insurance policies that expire at different times so your client doesn’t pay for more coverage than necessary.