Convertible Term Life Insurance: A Way to Permanent Coverage

Whole life insurance is the most common type of life insurance in the USA. And it is not without reason.

It would be nice if all of us could afford a whole life. At the end of the day, we just want to ensure financial stability for us and our families. 

But, the reality is different, and you might not be able to pay the expensive premiums this type of insurance brings.

What should you do about it? Should you give up the life insurance purchase?

We don’t want you to sit back with your hands tight. Here is how you can use convertible term life insurance as a stepping stone until you save enough money to buy a whole life policy.

Table of Contents

    Convertible Term Life Insurance in a Nutshell

    Convertible term life insurance is a type of term life insurance policy that provides coverage for a specific period, known as the term, typically ranging from 10 to 30 years. 

    The policyholder pays regular premiums, and in the event of their death during the term, a death benefit is paid out to the beneficiaries named in the policy.

    There’s one feature convertible life insurance offer that you won’t find with other term policies.

    You can convert it to permanent life insurance at any point! 

    And the best thing about it?

    You don’t need a medical exam or underwriting

    Permanent life insurance, such as whole life or universal life insurance, provides coverage for the insured’s entire lifetime as long as the premiums are paid.

    The conversion feature allows policyholders to convert their term life insurance policy into a permanent insurance policy, usually within a specified timeframe, without requiring evidence of insurability. 

    This means that even if the insured’s health has deteriorated since the inception of the term policy, they can convert it into a permanent insurance policy without undergoing a medical examination or providing proof of good health.

    Types of Term Insurance

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    The advantage of a convertible policy is that it provides temporary coverage during a specific period, which is often when financial responsibilities are highest, such as raising a family or paying off a mortgage. 

    If the policyholder decides they want permanent life insurance later on, they have the option to convert their policy without the potential complications of health changes impacting their eligibility.

    Specific rules and limitations may apply when you activate the conversion option as outlined in the insurance policy. The converted permanent insurance policy will have different premium rates and features compared to the original term policy.

    How Does Convertible Term Life Insurance Work

    Convertible term life insurance works by combining the features of a term life insurance policy with the flexibility to convert it into a permanent life insurance policy. Here’s how it typically works:

    1. The policyholder purchases a convertible policy from an insurance company. They choose the coverage amount and the length of the term, which is usually between 10 and 30 years. The premiums are based on factors such as the insured’s current age, health, and coverage amount.
    2. During the term of the policy, the insured pays regular premiums to keep the policy in force. If the insured passes away within the term, the death benefit is paid out to the beneficiaries named in the policy.
    3. The convertible life insurance policy includes a specific conversion period, which is typically a window of time during the term when the policy can be converted. This conversion period can vary depending on the insurance company and the policy terms.
    4. If the policyholder decides they want to convert their term policy into a permanent life policy, they can exercise the conversion option provided in the policy. This option allows them to convert their term policy into permanent insurance without the need for a medical exam or evidence of insurability.
    5. Upon conversion, the policyholder selects the type of permanent life insurance coverage they want to convert to, such as whole life or universal life insurance. The converted policy will have a new premium structure based on the insured’s age at the time of conversion, the selected permanent coverage, and the coverage amount.
    6. After the conversion, the policyholder receives a new policy document reflecting the converted permanent life insurance policy’s terms and conditions. The converted policy will continue to provide coverage for the insured’s entire lifetime as long as the premiums are paid.
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    Advantages of Convertible Term Life Policies

    We’ve highlighted the list of advantages you can get from buying convertible insurance:

    • Flexibility: The primary advantage of a convertible life insurance policy is the flexibility it provides. It allows policyholders to start with an affordable term policy that meets their current needs and budget. As circumstances change, they have the option to convert to a permanent one without the need for a medical exam or proving insurability. This flexibility is particularly beneficial if the insured’s health deteriorates during the term, as they can convert the policy regardless of their current health condition.
    • Future insurability: By converting a policy to a permanent one, policyholders ensure that they have life insurance coverage for their entire lifetime. This can be especially valuable if they develop health conditions or become uninsurable in the future. Converting eliminates the risk of being denied coverage or facing higher premiums due to health issues that may have emerged since the initial purchase of the term policy.
    • Cash value accumulation: Permanent life policies, into which term policies can be converted, often include a cash value component. This means that a portion of the premium paid accumulates as cash value over time. The cash value can grow tax-deferred and be accessed through policy loans or withdrawals, providing a potential source of funds for future needs such as education expenses, retirement planning, or emergencies.
    • Estate planning: Permanent life insurance policies offer benefits beyond just the death benefit. They can be used as a tool for estate planning, allowing policyholders to leave a legacy for their loved ones or provide funds for estate taxes, charitable giving, or business succession planning. Converting a term policy to a permanent policy ensures that these benefits are available for the insured’s beneficiaries.
    • Convenience: The conversion feature in convertible policies simplifies the process of transitioning from a term policy to permanent coverage. It eliminates the need to undergo a medical test or provide evidence of insurability, which can save time and effort. This convenience allows policyholders to secure lifelong coverage without the potential obstacles of health changes.
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    Disadvantages of Convertible Term Life Policies

    There is always another side to the coin. Here are the disadvantages you must be aware of:

    • Higher initial premiums: The conversion feature comes at a higher cost. Convertible policies often have higher initial premiums compared to other term policies. These higher premiums may be a disadvantage for individuals seeking the most affordable coverage during the initial term.
    • Limited period for conversion: Convertible term policies typically include a specified conversion period, which is a window of time during the term when the policy can be converted. Once the set period expires, the option to convert to a permanent policy is no longer available. This limitation means that if the policyholder misses the conversion deadline, they lose the opportunity to obtain permanent coverage without medical underwriting.
    • Permanent policy features and costs: While converting to a permanent policy offers lifelong coverage, it’s important to understand that the new policy will have different features and costs compared to the original term policy. Permanent life insurance policies often have higher premiums since they provide coverage for the entire lifetime of the insured. The cash value component in permanent policies also impacts premium payments.
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    • Policy suitability: Convertible life insurance may not be suitable for everyone. Some individuals may only need coverage for a specific period, such as until their mortgage is paid off or their children become financially independent. In such cases, converting to a permanent policy may not be necessary or cost-effective.
    • Potential lack of flexibility: While the conversion feature provides flexibility, it’s important to note that once the policy is converted to a permanent policy, the insured may lose some flexibility associated with term policies. Permanent policies often have more stringent payment requirements and limited options for adjusting coverage amounts or premium payments. 

    Who Should Buy Convertible Term Life Insurance

    Here are some situations where purchasing convertible term life insurance may be beneficial:

    • Changing insurance needs: A convertible term life policy is ideal for individuals who anticipate a change in their insurance needs over time. For example, if you expect to start a family, purchase a home, or take on other financial responsibilities in the near future, a term policy can provide coverage during that critical period.
    • Uncertain health conditions: If you have uncertain or evolving health conditions, convertible life insurance can be advantageous. By purchasing a term policy initially, you secure coverage at a more affordable rate. If your health deteriorates during the term, the conversion feature allows you to convert to a permanent policy without the need for a medical exam or proving insurability.
    • Financial flexibility: During the term, the premiums are typically lower compared to permanent policies, allowing you to allocate your resources elsewhere, such as paying off debts, saving for retirement, or investing. If your financial circumstances improve later on, you can convert to a permanent policy.
    • Estate planning: If you have estate planning goals, a convertible term policy can be a useful tool. It allows you to secure coverage during the term to protect your loved ones and provide for financial obligations.
    • Simplified underwriting: Convertible term life insurance eliminates the need for a medical exam or proving insurability when converting to a permanent policy. If you anticipate difficulties in qualifying for a permanent policy due to health changes or age-related concerns, a convertible term policy provides a convenient option to secure lifelong coverage without a medical underwriting process or even answering health questions.
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    What Permanent Coverage Should You Convert To?

    The best insurance you should convert to is a whole life insurance policy.

    Unlike term life insurance policies, this type of permanent coverage can build cash value over time.

    With permanent whole life coverage, you will have lifelong coverage and the opportunity to use it while alive, making a better financial situation for you and your family.

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    And that’s not all. With a whole life policy, you can become your own source of financing and have a private family bank.

    Here is how.

    Lifestyle Banking: With Whole Life Policy to Financial Independence

    Lifestyle Banking is a financial strategy that utilizes a whole life policy. As we already mentioned, these types of policies have a cash value that accumulates over time.

    The insurance company guarantees that the cash value will grow at a specified minimum rate, regardless of the performance of the investments underlying the policy. On top of that, if you buy your policy from a mutual insurance company, you will earn dividends.

    The amount of money paid through dividends isn’t guaranteed and will depend on the company’s performance, but there are ways you can predict it.

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    But, how does Lifestyle Banking actually work?

    Once the cash value is accumulated in your policy, you can borrow against it by taking out policy loans.

    The biggest advantage of policy loans is that the loan amount is not deducted from the cash value. This means that the cash value will continue growing despite your loan.

    What’s more, you can use the borrowed money for anything you need or want. No more waiting for approval, credit score concerns, high-interest rates, or other disadvantages that go with traditional banking.

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    Lifestyle Banking works with the same logic as traditional banking, but with one critical difference—it works for you, not against you. Lifestyle Banking is called that because it allows you to enjoy everything you want and truly own your lifestyle.