What Is Convertible Term Life Insurance?

When it comes to life insurance, term life policies are the most straightforward option available.
Get a Free Quote
What Is Convertible Term Life Insurance?

Written by Brian Greenberg
CEO / Founder & Licensed Insurance Agent

Last updated: November 24th, 2022

Reviewed by Paige Geisler
Licensed Insurance Agent

You set the length of the policy, pay monthly or annual premiums, and guarantee a death benefit should you pass within the term. However, sometimes your policy needs to change. Convertible term life insurance has the options you need to modify some or all of your policy into permanent life insurance.

What Is Convertible Term Life Insurance?

Convertible term life insurance starts as a traditional term life insurance policy with the option to convert it to whole or adjustable life insurance instead. When you make the conversion, you swap to a permanent plan type, which lasts until death. This also gives you the ability to build cash value within the policy. Not every term life insurance plan offers conversion and those that do often restrict when it can be done.

Ready to shop for life insurance?
Start here

How Does a Convertible Term Life Insurance Policy Work?

Possessing some of the best premium-to-benefit costs, term life insurance policies give you consistent premiums to budget around in addition to a predetermined death benefit for the length of the term. Typically, you will be offered terms between 5 and 30 years with convertible life policies. These options let you alter your coverage by changing to a different plan.

Some convertible term life policies come with a time limit on their conversions, such as limiting it to the first 5 years of the policy or increasing fees significantly if conversion is done after a specified timeline. This is why it is crucial to examine policy language and ask your insurance agent questions. You must make sure the policy you choose is the right one for you.

Can Convertible Term Life Insurance Change to a Permanent Policy?

Converting from a term to a permanent policy is the primary function of convertible policies. These policies allow policyholders to alter their plans in response to changes in their personal or family life. Changing to a permanent policy lets you build a cash value that you can borrow from. You can also adjust premiums and benefits as needed. These policies provide lifetime coverage that will not run out like a term life insurance policy.

What Are the Pros of Convertible Term Life Insurance?

Maximum Flexibility

Accessing the flexibility of permanent life insurance is one of the most beneficial provisions of convertible policies. Even the conversion itself can be flexible in that not all of your term plan has to be converted. A $300,000 term policy can be split in half, with $150,000 used to fund a separate permanent plan, with the remaining $150,000 left in the original term insurance plan.

No Additional Medical Exams

Depending on your age, current health, and the insurance market, taking an exam for a brand-new policy could increase your premiums. Converting a term life insurance policy forgoes another exam. Your premium will be based on the standing of your age and health determined when the policy began. Timing a conversion based on health changes can help save you money on premiums in the long run.

Company-Specific Incentives

Insurance companies are able to invest the funds paid into adjustable and universal life insurance policies, so it is common for them to offer additional credit toward your premium costs. While this can help transition you into the new plan, it is important to verify what your premium will be the year following the credit.

What Are the Cons of Convertible Term Life Insurance?

Not All Conversions Are Created Equally

If you are concerned about conversion options while shopping for term life insurance, one of the first aspects to check is which permanent policies are available should you convert. Every company will differ in its offerings. Some will have no restrictions, while others may limit you to specific whole life policies.

Investment Gains May Not Be Optimal

Those looking to convert to a variable or adjustable life insurance policy will likely want to take advantage of the ability to grow their premiums through both investment options and guaranteed interest accounts. Depending on the insurance company’s performance and the portfolios it invests in, the wealth you set aside for the market may be better off in a different vehicle.

Higher Premiums

The flexibility and potential for cash value growth come with higher premiums. The prices also reflect that coverage is guaranteed for life as you continue to pay your premiums. Timing your conversion is important, as converting after a change in your health or insurance market rates can lead to sharp increases in your premiums.

Ready to shop for life insurance?
Start here

Who Should Consider Convertible Term Life Insurance?

Anyone uncertain about their future needs can benefit from convertible term life insurance, but there are unique factors to consider outside the flexibility. You may be interested in convertible coverage to avoid the cost of term life insurance policy renewals or prefer the idea of securing your investment after paying large amounts of your money into a policy.

Health concerns are another reason you may prefer a convertible option. These policies allow you to extend your coverage without increasing your premiums based on new conditions. Uncertainty about your health also means you may not be sure how long you need coverage. This makes convertible term life insurance a more secure option.

Where Can You Purchase Convertible Term Life Insurance?

Typically, your employer offers options for life insurance, but this does not mean it will meet your needs. You can shop for insurance online and compare companies with review sites to see their current financial strength and customer satisfaction rankings. Shopping online can save you time and money when you do your research.

Are you unsure about what you need from your life insurance? Financial advisors can help you determine where you currently stand, along with projections based on each type of convertible policy. The goal is to find out which policy best fits, along with when you should convert to maximize coverage and benefits.

Ready to shop for life insurance?
Start here

Key Takeaways

Purchasing convertible term life insurance can keep your options open when it comes to leveraging life insurance solely as coverage, or as an additional investment vehicle. A majority of term life plans are convertible, but always check the fine print to see if conversion comes with any benefits or penalties.

Take Our Life Insurance Quiz
Take Our Quiz

Get the most accurate rates in 2 minutes or less
Making a financial decision doesn’t have to be stressful.
See what you qualify for by answering some health questions.