A convertible term policy is a type of insurance that provides coverage for a specific period of time or term. If you outlive the term, the policy can be converted to one of the permanent policies, like a permanent life insurance policy, which will continue to provide coverage until you die.
This type of policy can be an excellent option for those who want term life insurance policy protection but also want the opportunity to convert to permanent coverage if needed.
In this blog post, we will discuss convertible term life insurance in more detail and help you decide if it is the right choice for you.
In this article, you will learn about:
- What exactly is Convertible Insurance
- How Does It Work?
- How to convert your policy?
- When should you consider choosing convertible term life insurance?
- The advantages and disadvantages of converting your policy
- Term Life vs Whole Life Insurance – which one is an appropriate option for you?
- A new way to achieve financial freedom – The Infinite Banking Concept
What Exactly Is Convertible Insurance?
Convertible insurance is a type of life insurance that allows the policyholder to convert a term policy into a whole or universal policy without re-qualifying for health.
A convertible term policy allows the policyholder to convert a term policy that only covers the insured for a set number of years into a policy that covers the insured indefinitely as long as the policyholder continues to pay the insurance premium.
How Does It Work?
Most term life insurance policies are “level term life insurance policies,” which means that the death benefit and premium remain constant for the predefined duration of the term.
A convertible level term policy works in the same way, but it includes a provision, or a rider, that allows you to convert to a permanent life policy later on.
Without considering conversion, the policy will remain in effect until the end of the term. In fact, many people with a conversion clause in their policies are likely unaware of it and therefore do not use that option.
Converting a policy is much easier than applying for a new one. When applying for a new policy, the insurance company analyzes your age, lifestyle, and health status – through questions and a medical exam – to determine your premium cost.
However, when you convert a policy, you retain the health rating you had when the policy was first issued. There are no health questions or exams to uncover health issues that could resolve in additional cost – higher premiums cost. Many term policies include a standard provision that allows for conversion for the first few years, and some have an extension rider.
How to Convert Your Policy?
Each insurance company establishes its policy conversion procedures, but the process is straightforward overall. To begin, contact your insurance company or agent to determine what permanent life insurance policy conversion options are available and how long a conversion period will last.
One insurance company can let you convert to whole life or universal life policy, while others will only let you convert to a whole life policy. Others, on the other hand, will allow you to convert a portion of your term insurance coverage to permanent coverage.
This is useful because a permanent policy, such as a whole life policy, typically costs more than term life insurance.
It also provides advantages that term life cannot, such as:
- Lifetime insurance coverage
- A money value component with guaranteed growth that is tax-advantaged.
- The assurance that you or your beneficiaries will benefit financially
When Should You Consider Choosing Convertible Term Life Insurance?
Here is when you should choose a convertible term life insurance.
You Are Probable to Develop Health Issues
A term conversion option expands your options for mitigating life’s risks and uncertainties. If you have any of the following concerns, make sure you are eligible for term conversion credits of a term life policy before signing with a life insurance company.
A term policy can last for decades when many health changes occur. For example, you could be diagnosed with a chronic condition such as diabetes following a routine medical exam.
Even if well managed, it has the potential to significantly increase the cost of a new policy in the future.
In a situation when your health problems, could dramatically deteriorate, conversion may be the only viable way to remain insured and protected.
You Don’t Know Whether You Want a Term Policy or a Whole One
When purchasing a term life insurance policy, one of the first decisions you must make is how much life insurance you want.
Many people want to protect their family while their children are still growing up, so they purchase a policy that will last until the youngest child reaches adulthood or graduates from college, and they set on term coverage.
That’s a good strategy, but things can change. You may have another child or other family dependents to support, for example.
A conversion option can provide you with the adaptability you need to deal with changing circumstances and you should review it with your life insurance company.
You Cannot Afford One at the Moment
Life insurance becomes more expensive as you get older. Assume you want to get a 10-year term policy now but are concerned about the higher cost of renewing coverage when you’re ten years older.
In that case, convertibility provides you with an additional extension option if you require it later.
Most term insurance policies expire with no death benefit because most people outlive their policies. However, you may not see a return on your premiums paid.
After a few years of making regular premium payments, you may decide that a permanent policy and permanent coverage would be a better way to build value. Conversion may be the simplest and most cost-effective way to accomplish this.
The Advantages and Disadvantages of Converting Your Policy
Let’s take a look at pros and cons of convertible term life insurance:
The Benefits of Convertible Term Life Insurance
Whole life insurance provides numerous benefits that you can use while you are still alive. You can borrow against your policy’s value, use it to pay premiums, or even cash it out to supplement your retirement income.
If you can only afford a less expensive term policy now but believe you will prefer and be able to afford a more expensive permanent policy later and don’t want to take the risk that a change in your health will disqualify you from term coverage, you might consider a convertible term policy.
There are additional reasons to buy a convertible insurance policy. For example, you might want to convert from term to whole to ensure that your dependents are financially secure after your death.
Universal life insurance policies also include a cash value component that grows over time through dividends. While it takes time to accumulate savings, the cash value component is undoubtedly a useful tool.
The Drawbacks of Convertible Term Life Insurance
Convertible term insurance does not guarantee that you will be able to obtain a permanent policy for the same price as a term policy if you convert. Permanent insurance is always more expensive than term insurance, all else being equal.
Some insurance companies will collect a lump-sum payment up front to preserve that age calculation for those who want to use their actual age for the conversion process in order to save on later premiums (rather than attained age at the time of conversion).
When purchasing a convertible insurance policy from an insurance company, there are specific requirements when you can convert the policy. For example, after the age of 65, you are not allowed to convert your policy. Many insurance companies include conversion deadlines in the majority of term life insurance policies.
Once the deadline has passed, policyholders will be unable to convert their insurance policies.
Term Life vs Permanent Life Insurance – Which One Is the Better Option for You?
Life insurance is a life policy that pays out a death benefit to your designated beneficiaries when you die.
Term life insurance offers protection for a specific period of time, usually 10-30 years.
On the other hand, permanent life insurance coverage offers lifetime protection as long as you continue to pay your premiums.
Both types of life insurance have their pros and cons, so it’s essential to evaluate your needs and choose the right kind of policy for you.
If you’re looking for affordable life insurance coverage, term life insurance is usually the best option. Paying premiums is generally much cheaper than permanent insurance premiums, and you can choose how long you need coverage (except for permanent coverage).
For example, if you only need coverage until your children are grown and out of the house, a 20-year term life policy would be sufficient.
Permanent life insurance is more expensive than term life, but it also offers some additional benefits. One of the most significant advantages of this life insurance is that it builds cash value over time.
This permanent coverage cash value can be accessed through policy loans or withdrawals, and it can be used for a variety of purposes, such as funding retirement, mending personal finance or covering unexpected expenses.
A New Way to Achieve Financial Freedom – the Infinite Banking Concept
Infinite Banking or Overfunded Life Insurance allows you to operate and borrow money in the same way that a traditional bank does, but without relying on a third party. You will be a creditor as well as a lender.
Instead of borrowing from a bank, you borrow money against yourself to control cash flow while still allowing your whole life policies to earn dividends (build cash) even though you are using that money elsewhere and gain liquidity in life insurance
In other words, you accumulate wealth by borrowing and repaying the cash value of your permanent life policy.
One of the most significant benefits of this concept of using a whole life insurance as a bank is that you will never have to deal with banking fees or loan interest rates. You can borrow money as a policyholder by using your policy’s cash value.
You would never have to borrow money from a bank again if you used this borrowing setup. Instead, you would borrow for yourself (via your existing policy) and pay yourself back over time. As a result, you are your own bank.
Infinite Banking’s goal is to replicate the process as much as possible to increase your bank’s value. The lending and repayment of money typically held in the cash value of a policy occurs during the duplication process.
Infinite Banking enables you to better work toward your individual and unique financial goals for yourself and your family, as well as maintain control over your finances without having to deal with banking fees or loan interest rates.
Infinite Banking entails:
- Overspending (with after-tax funds) a life insurance company high cash value whole life insurance policy
- Cash Value Accumulation (tax-free) You have been a policy owner for many years.
- Loans taken out against the cash value of your policy to cover financial expenses.
You gain financial freedom and control of your money by borrowing for yourself, repaying, and so on – simply by being your own bank.
Implementing this banking strategy into your life gives you much better control over your finances and aids in the accumulation of wealth through the use of a life insurance policy and secures your financial future.
Final Thoughts
To conclude:
- A convertible life insurance policy is a type of life insurance that allows the policyholder to convert the policy to a different kind.
- The most common convertible insurance policy is a convertible term life policy, which can be converted to a whole life policy.
- Convertible policies are often more expensive than non-convertible policies, but they offer the policyholder more flexibility.
- A convertible insurance policy allows the policyholder to convert the policy to another type of life insurance and extend coverage of their new permanent coverage.
- The most common convertible life policy is a convertible term life policy, which can be converted to a whole life policy.
- Convertible term life policies are often more expensive than other policies, but they offer the policyholder more flexibility.
These policies are a good option for people who are unsure what type of life insurance they need or who may need to change their life insurance in the future.
We hope we brought the topic of Convertible Term Life Insurance closer to you and helped you make a decision if they are the right company for you.
Consider Infinite Banking if you want to receive life insurance while also changing your life and gaining a safe financial future
At Wealth Nation, we’ll show you how to use your whole life insurance to manage, make, use, and expand your money fully autonomously. Watch the free Wealth Nation Masterclass, to discover more!