Quick answer
Convertible term life insurance is a term policy that includes a contractual right to exchange the term policy for a permanent (whole or universal life) policy without a new medical exam. The conversion preserves your original health class even if you have developed a serious condition like cancer, diabetes, or heart disease since the original issue. The new permanent policy is priced at your current attained age but at the original health class, so the premium is higher than the original term but lower than what you would pay if you applied for permanent insurance with the new health condition. Convertibility is one of the most valuable provisions in any term policy and is a deciding factor when comparing carriers.
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.
Frequently Asked Questions
What is convertible term life insurance?
Convertible term life insurance is a term policy that contains a contractual conversion option allowing the policyholder to exchange the term policy for a permanent (whole or universal life) policy without a new medical exam, application questionnaire, or third-party records check. The new permanent policy is issued at the policyholder's original health class but at the current attained age. Convertibility is a standard provision at most A-rated U.S. carriers (Banner Life, Protective, Pacific Life, Lincoln, Prudential, Mutual of Omaha, Corebridge) and is one of the most valuable features in any term policy.
How does the conversion option work?
You notify the carrier in writing that you want to convert all or a portion of the term policy. The carrier sends you a Conversion Form which you complete with the new policy type (typically whole life, guaranteed universal life, indexed universal life, or variable universal life from the carrier's in-house lineup) and the death benefit amount (must be equal to or less than the original term face amount). You sign the form and pay the new permanent premium going forward. The conversion does not require a medical exam, application questionnaire, MIB or Rx records pull, or any underwriting review.
How long do I have to convert a term policy?
The conversion window varies by carrier and product. Common conversion windows: Banner Life - first 10 years of the term, regardless of remaining term length, Protective - first 10 years or up to age 70, Pacific Life - first 5 to 10 years depending on the product, Lincoln Financial - up to age 70 or the end of the level-premium period, whichever comes first, Prudential - first 10 years or until age 65, depending on the term length. Always read the policy's conversion provisions carefully because they vary significantly between carriers and products.
What is the cost of converting term life to permanent insurance?
The new permanent premium is calculated at the policyholder's original health class but at the current attained age. Sample: a 35-year-old who locked Preferred Plus on a 20-year term policy and converts at age 50 will be issued the new permanent policy at Preferred Plus rates at attained age 50 (not the original age 35). The new whole-life or universal-life premium is typically 5 to 15 times the original term premium because permanent insurance is much more expensive per dollar of death benefit. Conversion does NOT require any medical underwriting; the new premium is based on age and original class only.
Why is convertible term life insurance valuable?
Because it locks in your insurability at your original health class for the life of the conversion window. If you develop diabetes, cancer, heart disease, sleep apnea, or any other condition during the term, you can still convert to permanent insurance at the original health class - whereas applying fresh for permanent insurance with the new condition would result in much higher premiums, table-rating, or an outright decline. This is especially valuable for buyers who may want lifetime coverage later (estate-tax planning, special-needs dependent, charitable giving) but cannot commit to permanent rates today.
What permanent products can I convert my term policy to?
Available conversion products vary by carrier. Banner Life is notable for allowing conversion to its full permanent lineup including whole life and several universal life products. Protective allows conversion to its Custom Choice UL and ProClassic NL whole life products. Pacific Life conversion is typically limited to a single in-house universal life product. Lincoln Financial allows conversion to Lincoln WealthAccumulate IUL and Lincoln LifeElements Term. Prudential allows conversion to PruLife Founders Plus IUL and other lineup options. The best carriers for conversion flexibility are Banner Life, Protective, and Lincoln Financial.
Can I convert only part of my term policy?
Yes, most carriers allow partial conversion. You can convert any portion of the original face amount to permanent insurance and keep the remainder as term until the term expires. For example, a buyer with $1 million of 20-year term might convert $200,000 to permanent for estate-planning purposes and keep $800,000 as term to cover the remaining mortgage years. The minimum conversion amount is typically $25,000 to $100,000 depending on the permanent product. Partial conversion is a common estate-planning strategy because it lets you build a permanent legacy policy without giving up the cost efficiency of the remaining term coverage.
Do I need a medical exam to convert term life?
No. The whole point of the conversion option is that it bypasses underwriting entirely. The carrier does not require a paramedical exam, application questionnaire, MIB check, prescription history pull, or motor vehicle records pull during conversion. The new permanent policy is issued at your original health class regardless of your current health. This is the single most important feature of convertible term insurance and is the reason many financial planners recommend convertible term as the default choice over non-convertible term products.
Is all term life insurance convertible?
No. A small number of term products are non-convertible or have very limited conversion windows. Always verify the conversion provisions before buying. Examples of non-convertible or limited-conversion products: some very-low-cost online-only term products from Ethos and Bestow have shorter conversion windows than the major fully underwritten carriers, group life insurance from an employer is usually convertible to individual permanent insurance only when you leave the group, and some specialty short-term products (annual renewable term used for bridge coverage) have limited conversion options. Always confirm conversion in the contract before signing.
When should I convert my term life insurance?
Common reasons to convert: (1) you have developed a health condition during the term that would make new underwriting expensive or impossible, (2) you have estate-tax exposure and want lifetime coverage to fund the estate-tax bill, (3) you have a special-needs dependent and want guaranteed coverage past the original term, (4) the term is nearing expiration and you want to lock lifetime coverage at the original health class, or (5) you have accumulated significant assets and want to use permanent insurance as a tax-efficient asset-protection vehicle. Always convert before the conversion window closes (typically the first 10 years of the term or before age 65 to 70).
