A term conversion rider allows a policyowner to convert his or her term life insurance policy into a permanent policy without having to go through underwriting or proving insurability again. This rider is oftentimes automatically included for free on most term policies – bonus! Just because there is a term conversion rider attached to the policy, does not mean you are required to convert later on down the road. It’s just there as an option if you choose to take advantage of it.
The Benefits of a Term Conversion Rider
Most of the time a simple term life insurance policy is all people need. As you’re paying off your mortgage, raising your children, and saving for retirement, your income is vital to your loved ones. A term policy will protect your income during those ever-so-important years. However, life is anything but static. You may decide later on that you want life insurance coverage for a longer time period or indefinitely. This is when a term conversion rider really becomes handy.
With a term conversion rider,
- You maintain the original health rating from the term policy when you convert, even if you have health issues or become uninsurable.
- You can decide when and how much of the coverage to convert (as long as it’s before the conversion expiration date.)
- You can start building cash value with the new permanent policy.
- You can opt to have life insurance coverage for your entire lifetime.
How a Term Conversion Rider Works
Each term conversion rider has an expiration date. This expiration date varies by company and product. The policyowner has until this expiration date to convert his or her term policy into a permanent policy without needing to go through underwriting. It’s important to note, however, that your age will be considered. So, if you purchased the term policy at age 30 and later on decide to convert, your premiums will be based on your current age, not age 30.
It’s also important to note that some carriers allow partial conversions. Instead of converting the entire term coverage amount into a permanent policy, you can just convert a portion of it. For example, if you have a $500,000 term policy, some carriers will allow you to just convert $50,000 of it into a permanent plan. This will leave you with two separate life insurance policies: one $450,000 term policy and a $50,000 permanent policy. Some insurance companies require you to retain the term policy at a minimum amount, however. For example, if Insurance Company 123 requires you to retain $250,000 on your term policy after you convert, someone with a $275,000 term policy would not be able to convert $50,000 into a permanent plan because that would leave their original term policy short of the minimum coverage.
Many carriers give you the option to convert different amounts at different times. This can help offset the costs of moving from term to permanent insurance. If you only convert a partial amount, your new term policy premiums then reflect whatever coverage amount is left on your term policy. For example, if you were paying $20 per month for a $500,000 term insurance policy and then you decide to convert $250,000 to a permanent policy, your term premiums will then drop to $13 per month, which is the cost of having a $250,000 policy.
One big difference (other than cost) between term and permanent insurance is how much coverage you need. With term insurance, you are usually aligning your term length in time with the years of your life in which you have the most debt, e.g. a mortgage, raising children, college tuitions, etc. If you end up wanting to convert into permanent insurance, you likely won’t need as much coverage. Your children may be near adulthood and your mortgage is much closer to being paid off. Let’s take a look at some examples to get a better grasp of term conversion riders.
Jane Smith purchased a $1M 20-year term policy at age 30 when her son was 5 years old. At age 35, she is diagnosed with breast cancer. Her doctors are optimistic, but she does not want to risk a recurrence happening later on in life after her term policy terminates. Because her policy has a term conversion rider, her medical diagnosis does not matter since she does not have to prove insurability. She decides to convert $250,000 into a permanent policy.
She now has a $750,000 term policy (with 15 years left until it terminates) and a $250,000 permanent policy which she will have her entire lifetime to ensure her son will be financially stable, have the funds to pay for any medical bills she may accumulate, and cover the cost of a funeral when she dies.
John Doe is 27 years old and has a 30-year $250,000 term policy through Insurance Company ABC. He purchased it mainly to cover his funeral costs and mortgage so his wife would not be left covering these expenses by herself if John dies prematurely.
At age 35, he and his wife have their first child. He then decides to convert $50,000 into permanent insurance to ensure there will be funds available for his child in the future. He now has a $200,000 term policy (with 22 years left until it terminates) and a $50,000 permanent policy.
At age 37, he and his wife have a second child. He decides to convert another $50,000. He now has a $150,000 term policy (with 20 years left) and two separate $50,000 permanent policies.
Eliza Johnson purchased a 20-year $250,000 term life policy when she was 30 years old. At the time, she was overweight and had adult onset Type 2 diabetes. Because of her health issues, the best risk class she could qualify for at the time was Standard Table 4. Table 4 is eight classes below the best possible risk class (Preferred Plus). Her monthly premium for this policy is $40.
Now ten years later, Eliza has a family including two children. She would like to have life insurance coverage for a longer period of time. Her policy does include a term conversion rider; however, Eliza is now at a healthy weight, has normal blood glucose levels, and her risk of diabetes complications is much lower. She has been sustaining a healthy weight and optimal blood pressure, cholesterol, and glucose levels for five years.
If she were to convert her policy into a permanent policy, her Standard Table 4 risk class would carry over. This would equal out to be very high premiums. Instead, Eliza decides to apply for a new 20-year $250,000 term policy. Even though she is now ten years older, her health has significantly improved to allow her to qualify for Standard ratings. Her monthly premiums would then be approximately $30. In this case, it would make more sense for Eliza to apply for a new term policy versus converting to a permanent policy.
A quick recap of term conversion riders:
- Whatever risk class you were approved for when you purchased the term policy, you keep when you convert, even if your health has deteriorated.
- Your current age will be considered when determining your new permanent policy’s pricing, not the age you were when you applied for term insurance.
- Some insurance carriers require a minimum amount of coverage to be left on the original term policy if you are doing a partial conversion.
- Each life insurance carrier has their own restrictions regarding when you can convert. For example, some carriers don’t let you convert within the first five years, some only let you convert within the first twenty years, and some will let you convert at any time.
- Life insurance carriers set a maximum age for when you can convert. For most carriers, this age is either 65 or 70.
If you have a term life insurance policy and your conversion expiration date is approaching and you want to be insured for a longer period of time, you have two options: convert to a permanent policy or buy a new policy. If you are still as healthy as you were when you took out the policy (or maybe healthier now?), you may want to investigate the cost of a new policy versus converting into a permanent one. With a new term policy, you won’t have access to accumulating cash values like permanent policies offer, but you can be insured for another term at a significantly lower cost compared to permanent insurance. However, if your health has deteriorated even in the slightest, you are an ideal candidate for converting.
Most of the life insurance companies Quotacy works with include the term conversion rider automatically on their life insurance products. Some insurance companies forgo riders in order to make their process faster and premiums a little cheaper. When your policy is issued, it will state which riders are included. If you would like to know before you officially apply, you can ask your Quotacy agent if the policy you are interested in purchasing includes any riders. They will be happy to assist you in finding the policy that best meets your needs. You can start by exploring costs with our term life insurance quoting tool.
Photo credit to: Andrew Branch