What does having a term conversion option matter?
Many term life insurance policies automatically include a conversion option at no charge. A conversion option allows a policyowner to convert their term life insurance policy into a permanent life insurance policy without requiring proof that the insured individual is still insurable. In other words, even if the insured person developed a serious illness, such as cancer, the term policy can still change into a permanent policy.
While a new medical exam or questionnaire is not required, there are some factors to know.
There is a time limit on conversion.
The term policies that include a conversion option have a timeframe in which you are allowed to convert. For some policies, you may be able to convert right up until the day the term is about to expire. For others, you may only have a few years in which you need to decide if you want to convert.
This timeframe is not a secret. Before you buy a term policy, simply ask about the term conversion expiration period.
There may be conversion product limitations.
While individual life insurance companies may have many different permanent life insurance products to choose from, they may only allow you to convert to certain ones. For example, maybe their suite of permanent products include a whole life, universal life, and indexed universal life insurance policy but they only permit conversion to the universal life product. Some insurance companies allow you to convert to any of their permanent products.
Your premiums will increase.
When you convert from a term life insurance policy to a permanent life insurance policy, your premiums will not increase based on your health—again, there is no underwriting involved—but your age is considered. For example, you may have purchased the term policy at the ripe age of 30, but if you decide to convert at age 60, you will be given premiums based on the cost of a permanent life insurance policy of a 60-year-old not 30-year-old.
In addition, permanent life insurance is also more expensive than term life insurance anyway. This fact also contributes to your premiums increasing when you convert.
» Learn more: How Do Term Conversions Work?
The converted premiums are based on your original risk class.
Whatever the risk class is that you were assigned when you first purchased the term life insurance policy is the risk class that will be considered when you convert. If you received the best risk class possible (Preferred Plus) and ten years later you are diagnosed with Parkinson’s disease, you can still convert based on the original Preferred Plus risk class.
You may opt to only make a partial conversion.
Some insurance companies allow you to make partial conversions. A partial conversion is when you only take a portion of your term policy’s face amount and convert it to a permanent policy. In doing so, you then have two separate policies.
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, let’s say you’re paying $20 per month for a $500,000 term insurance policy. You’re 50 years old and decide to convert $250,000 to a permanent policy. Your term premiums will then drop to $13 per month, the cost of having a $250,000 policy. The remaining $250,000 will convert to a permanent policy and your premiums will be based on the price of what a current 50-year-old person would pay for a $250,000 permanent policy, based on your original risk class.
The main restriction when it comes to partial conversions is that you must meet the minimum face amount for both remaining policies. Minimum face amounts vary between life insurance companies but they tend to range from $50,000 to $250,000. This means that if you want to make a partial conversion, you have to convert at least the minimum face amount. If you plan on also keeping the remaining term life insurance policy, it also has to meet the minimum face amount.
The death benefit from a life insurance policy won’t bring you back and it won’t heal the emotional suffering, but it can help ease any financial pain that would have occurred as the result of your sudden death.
Why does this conversion option matter?
Less than 1% of term life insurance policy owners convert their policies. Most people only need term life insurance and the premiums are very expensive when you convert so most choose not to. But for the 1% of people that do convert, those increased payments are worth it.
As mentioned earlier, when you convert a term policy into a permanent policy you are not underwritten again. The ones who do convert are people who suddenly find themselves with a shortened life expectancy and likely would be deemed uninsurable if they tried to apply for more life insurance coverage.
These individuals have loved ones that they don’t want to leave suffering under the weight of medical bills and funeral costs. Imagine owning a 20-year term life insurance product and finding out you have an incurable disease just a year or two before your life insurance policy is about to expire. With a conversion option, you could turn that term policy into a permanent policy ensuring that the insurance company writes your family a death benefit check.
The death benefit from a life insurance policy won’t bring you back and it won’t heal the emotional suffering, but it can help ease any financial pain that would have occurred as the result of your sudden death. Yes, the premium payments increase drastically when you convert, but if your time on this earth is limited then the cost is likely worth it.
When you apply for term life insurance on Quotacy.com you will be able to see if the product has a conversion option before you even apply. Most of the insurance companies Quotacy works with do include a conversion option on their term policies—free of charge.
There is no time like the present to buy life insurance coverage to protect your family.
» Compare: Term life insurance quotes
Watch the Term Conversion Matters Video
Welcome to Quotacy’s Q&A Friday where we answer your life insurance questions. Quotacy is an online life insurance broker where you can get life insurance on your terms.
I’m Jeanna and I’m Natasha.
Today’s question is:
Why does having a conversion option on my life insurance policy matter?
Recently we received an interesting question from one of our blog readers. The individual asked how does a life insurance company benefit from a policyowner converting their term policy? What’s in it for them?
And the answer is that a life insurance company doesn’t actually benefit much at all from a conversion and it’s more likely to be a disadvantage.
Before we get into explaining this let’s first review what a term conversion is. A term conversion is when all or some of your term policy is converted into a permanent insurance policy, like a whole life or universal life insurance policy.
The difference between converting your term policy into a permanent one versus just buying a brand new permanent policy is that when you convert, the insurance company doesn’t underwrite you again.
Underwriting is when the insurance company evaluates your risk factors to determine how much you need to pay for life insurance. They did this when you first purchased your term policy and when you convert, they just convert it based on your original risk class.
However, your age still comes into play. So if you bought a term policy at age 35 and were given a preferred rating and at age 50 you decide to convert to a permanent policy your new permanent life insurance premiums will still be based on that preferred rating but you will be paying the rate of a 50 year old, not a 35 year old.
So now let’s go back to our original question: how does a term conversion benefit the life insurance company?
Initially you might think they benefit because the premiums of the policyowner’s new permanent policy are much higher than what they were originally paying for that term policy.
Term life insurance is much cheaper than permanent life insurance. Term life insurance is the best policy for most people and roughly only 1% of term policy owners actually end up converting.
The premiums increase drastically when you convert so most people don’t. But for that 1% that do convert it’s often because the price is worth it.
As mentioned earlier, when you convert the insurance company doesn’t underwrite you again. People who find themselves with a suddenly shorter life expectancy are the ones who convert.
Say you bought a 30-year term policy 25 years ago when you were 35 years old and now you’re 60 and are diagnosed with stage four cancer.
You only have five more years left of term life insurance coverage. You might die within those five years or with treatment you may live longer. Do you think it’s worth it to convert your term policy into a permanent policy knowing you can leave your family a death benefit no matter when you end up dying?
Medical bills are no joke and you and your family will likely do everything possible to treat the cancer. If you don’t convert your policy and you do end up dying after it expires you suddenly leave your family heartbroken and with a lot of medical bills.
This is the situation of many people who convert their policies. They know they’re unhealthy and can’t get insured anywhere else and they don’t want to leave their families in debt.
Life insurance companies are paying out large death benefit checks when policies convert. The policyowners are paying higher premiums but probably not for very long.
Some life insurance companies are actually reducing or eliminating their conversion benefits. It’s costing too much money.
So really the only benefit insurance companies get out of providing conversion options is that they know they’re doing right by their customers. It gives individuals who find themselves with a suddenly shorter life expectancy a chance to financially save their families.
So to answer our Q&A question: why does having a conversion option on my life insurance policy matter? It matters to your loved ones.
It’s hard to come to terms with one’s own mortality and you don’t know what your life will look like 20 or 30 years from today. Consumers tend to undervalue having a conversion option on a term policy.
Life Insurance Company A may sell their 30-year $250,000 term policy for $20 per month but Life Insurance B may sell the policy for only $18 per month. Your gut reaction is to go with the $18 per month policy. The $18 per month policy may not have a conversion option and again only 1% of policyowners use it but what if you are that policyowner?
If you apply through Quotacy, before you choose a policy, you can check to see if it has a conversion option. Most of the companies we work with do offer a conversion option.
If you buy life insurance outside of Quotacy, ask your agent if the policy has a conversion option. If you already own a policy, check the policy’s fine print or call the insurance company and ask.
Many people don’t end up converting term insurance and many don’t need to, but it’s nice to have the option to do so.
If you have any questions about life insurance, make sure to leave us a comment. And if you’re ready to get quotes, check out Quotacy.com. We’re here to help you find the best deal on the life insurance you want.
About the writer
Writer, Editor, and Co-Host of Quotacy’s Q&A Friday YouTube Series
Natasha writes and edits content and is co-host of Quotacy’s YouTube series. She is also working toward her Chartered Life Underwriter (CLU) designation. When not working or studying, you’ll find her throwing a tennis ball for her pitbull mix, Emmett, or curled up on her couch watching Netflix. If it’s football season, the Packers game will be on.