So you have decided that you want a level term life insurance policy, what next? As you will know, this is a short-term policy that only lasts for a set period of time before you either have to renew or find yourself a completely different policy.
For many years, there has been a misconception that these are your only options with term life insurance but this is far from the truth. In fact, today we have two other options – convertible term life insurance and renewable term life insurance.
What is Convertible Term Life Insurance?
As a life insurance rider within your policy, having the conversion option in place enables you to convert your ordinary level term life policy into a permanent life insurance option during the coverage.
Furthermore, you won’t have to provide evidence of your insurability again which means that your initial medical examination will be used – the one they took when you first signed up with the company.
As long as you convert all or a portion of the policy’s face amount before the expiry date it will become a permanent policy; it is also important to note that most companies will have age restrictions.
For example, although there are companies that break from the mold, the average company seems to require that the policy’s conversion option be exercised somewhere around 65 to 75 years of age.
Even if you have come down with a serious illness since you had the policy, if life insurance is convertible, the policy can be converted to permanent coverage guaranteed.
The company would convert all or a portion of your face amount into permanent coverage, typically into one of the company’s universal life insurance policies. The company would convert the policy based on your original health class rating, with an adjustment for your age, based on the particular policy you are converting to.
Example – As an example, let’s use Samantha who was aged 30 when she bought a 20-year policy. She originally qualified for the preferred best rate class. She included a conversion rider so she had the option ready and waiting to activate at any point before she turned 50.
Sadly, she has now been diagnosed with Type 1 diabetes. Luckily, the conversion allows Samantha to convert her term life policy into a permanent option at the same rate a healthy 50-year old would see. If she were to let the term life policy expire and then find a new one, she would pay considerably more money because the medical condition would be taken into account.
Now, let’s address a fairly common question –
What does my term life policy convert into?
Often, this is something we forget but it is very important because it will decide the policy you have until death. Essentially, the coverage will remain exactly the same so if you had a $300,000 term life policy, it will become a $300,000 permanent policy.
If you wanted to increase the amount of coverage you receive, you insurability will need to be proven, which means a medical examination or medical questions at the very least.
On the flip side, you might want to decrease your coverage if you have paid off your mortgage, reduced your debts, or if your children have grown up and moved out of the family home. If this is the case, you can choose to convert only a portion of your death benefit.
Types of Life Insurance
In terms of the actual types of life insurance, this will completely depend on what life insurance company you are with as well as the agreement made right at the very beginning of the contract.
If you are looking into life insurance right now, make sure you are aware exactly what you are being offered with a convertible life insurance policy. If you can’t find the information anywhere, simply ask the insurer and they should tell you what will be available at a later date.
For example, one solution would be a whole life insurance policy but this is a little more expensive than other types. Of course, since it is cash value life insurance, it could provide a huge benefit for your retirement or if you want to use it as security for a loan in the future.
On the other hand, some policies will convert into a universal life insurance policy. As well as being more affordable, the cash value here is only really used to keep the premiums at a steady rate so there isn’t the same cash value accumulation mindset with this type of policy.
Who Needs Convertible Term Life Insurance?
As we all know, different policies are aimed at different audiences so who does this rider and policy suit?
First and foremost, it will be perfect if you are still young and don’t have the financial backing just yet for a permanent insurance policy. For a set time period, you can pay lower premiums before then making the switch at the right time. By the time you activate the conversion clause, you might have settled down with a higher-paying job. If you have been worried about the cost of permanent insurance, this is a great way to get cheap life insurance and have the peace of mind of coverage.
Furthermore, it is also a really good idea for those who are unsure what their finances might look like in a few years’ time. For example, you might not know whether your debts will still exist, whether you will have paid for your house just yet, or whether you have any children. Rather than buying a permanent insurance policy you can dip your toes into the market with a term life option.
Then, you have flexibility no matter what happens in the future. If you still have debts, you can convert it into a permanent option; if your debts have reduced significantly, you can convert but reduce the coverage and enjoy cheaper premiums; if you have paid everything off and have money saved for final expenses, you can just let the policy expire. With this flexibility, you can make the right decision for yourself however many years down the line.
Life insurance statistics show that 98% of term life policies expire or are canceled. Rather than cancel your policy or let it expire, consider two options.
The first option is choosing return of premium life insurance. Upon expiry, all your premiums are returned to you. This is a great method for getting the coverage you need, with the benefit of receiving a lump sum payment down the road.
The second option is to use your term life insurance conversion option and sell your policy to a life settlement company. Do your due diligence ahead of time to see if it makes sense, but this can be a great way to make money fast and recapture all your premiums and then some.
And if you convert the policy and choose to keep it, see if your family can help pitch in for the premiums. After all, who stands to benefit the most from the life insurance? If it is a sizeable death benefit, paying premiums for a decade might be well worth your kids while if they stand to reap a large return on investment.
So we spent the first part explaining the benefits of convertible term life insurance. Now we want to bring awareness to another option, renewable term life insurance.
What is Renewable Term Life Insurance?
If a convertible policy doesn’t quite sound right for your needs, there is another option – annual renewable term life insurance policy.
With this in place, you will have an opportunity to extend your coverage before your current policy comes to an end.
Once again, you won’t have to prove your insurability so any health problems you have experienced since opening the policy will not be considered.
Types of Renewable Term Life Insurance
When looking through your options, you will notice two different types of this insurance and the most common solution is Annual Renewable Term (ART).
As the name suggests, the ART policy will renew at the point of expiration each and every year.
In terms of the positives, this is good because it is guaranteed and you won’t have to worry about going through the underwriting process every time.
However, there is a negative to this because your age will increase by one year each time so the policy premium will steadily increase. Years down the line you could find that your premiums are too much to handle.
Which Option is Better?
Let’s not beat around the bush, this question is nearly impossible for us to answer because we would have to give a different answer to every single person reading this guide. However, there are some clear advantages and disadvantages to both.
While the convertible term life insurance policy allows you to have the best of both worlds and convert to a permanent option whenever required, the renewable option means that you can take things more slowly. On the other hand, the convertible rider can be somewhat more expensive because you are locking into a 10 year or 30 year term life insurance policy and the renewable option will have your premiums increase each year.
Often, annual renewable term is only for someone who intends to keep the coverage for 1-3 years. After that, you might want to run quotes and see what different life insurance rates are on the different term lengths.
Before you make any decisions, you will need to consider your own situation and what would make each option worthwhile and worthless.
- How much money can you currently spend on insurance?
- What debts do you currently have?
- Will these debts still exist many years from now?
- Are you likely to need a permanent policy in the future?
- Do you have a health condition that will get worse with time?
- Do you want to protect yourself from health conditions?
- How much will your premiums increase by with a renewable term life insurance policy?
Once you can answer all of these questions and more, you should be pointed in a certain direction rather than choosing one yourself and hoping for the best.
All things considered, both renewable and convertible term life insurance policies can be useful to the right people. Rather than choosing a traditional term life policy and watching as it expires, the conversion option provides an option for what happens after whether it renews year-by-year or converts into a permanent option. If you’re currently looking for insurance, take your time, don’t rush into any decisions, and find the right policy for yourself!