Lewis & Ellis Inc.

Convertible term life insurance

Life Insurance and Annuities
by Lisa Jiang
Convertible life insurance is useful for many people.
Convertible life insurance is useful for many people.

When it comes to picking the right life insurance policy, there are many options for consumers to consider. Regardless of the insured's current situation or financial goals, there's likely a kind of life insurance that fits their particular needs. One of the most versatile choices on the marketplace is convertible term life insurance. Let's learn more about what it is, whom it's for and other necessary information. 

What is convertible insurance?

Term life insurance usually only lasts for a certain predetermined period of time, anywhere from 10-20 years. This is what is normally called term life insurance because it has a set "term." This is in contrast to permanent life insurance which lasts as long as someone lives. In most cases, a term life insurance policy falls under the category of convertible life insurance.

Convertible life insurance means that the term insurance policy can be exchanged for a permanent coverage or whole universal life insurance policy, as long as it's by the same insurer.

It's not uncommon for term life insurance policies to have a built-in conversion opportunity for the first few years of the policy's term. In some cases, there is a chance for the policyholder to change the policy through something called an Extended Conversion Rider (ECR), but there are some fees associated with this addition. This is why convertible term insurance may be a better option: the conversion opportunity is built in from the beginning and is available for a longer period of time.

How the conversion process works

After the client buys the policy, the client should contact the insurer to make the policy issuer aware that the conversion process can proceed. Everything should be laid out from the beginning, so the policyholder is aware of what kind of life insurance they are changing from.

Pros and cons of convertible insurance

Even though there are many different advantages to convertible life insurance, there are also some things that clients need to keep a close eye on.

Benefits of convertible life insurance

If someone doesn't have a lot of money now to pay for the premium of whole permanent life insurance, convertible life insurance may be a good choice for them. That's especially true if they think they might have the funds to switch later down the road. It's a great option for anyone who isn't able to get the insurance they want now but has big goals to take care of their family later after they pass away.

Convertible life insurance affords the policyholder more flexibility and options, which is hugely important to some people, depending on their circumstances. Many people are attracted to the fact that some insurance companies offer the choice of getting premium credits. In most cases, a permanent life policy can be made more affordable later.

Someone may pick convertible life insurance because these policies often offer lower premiums in comparison to other policies, typically because the death benefit of a convertible policy is usually lower than that of a permanent policy. The policyholder usually doesn't have to worry about their health or general age, which may be better for some people than others. There are certain requirements that an applicant must meet in order to qualify for the policy, which is unique to each insurance company.

What to keep in mind about convertible life insurance

Make sure clients know that choosing convertible life insurance doesn't mean that they can get a permanent policy for the same price as a regular renewable term policy. There will just be less underwriting, so the process of switching from one to another is simpler than it would be otherwise.

In addition, the policyholder needs to know there's a specific time when they'll be able to actually convert their life insurance. Be sure the policyholder understands there's also a point at which the client will be unable to convert the policy. In some cases, this time frame is around age 65. As either the actuary or the insurance company that is providing the product, make sure the insured is as aware of the ins and outs of the convertible life insurance policy as possible.

Rules and regulations

When it comes to the actual conversion of the term life policy into a permanent policy, there are several legal regulations. As the entity offering the product, it's your obligation to make sure that the process follows these requirements carefully. Each insurance company sets its own rules, which can vary depending on the specific policy issuer. There is no one size fits all situation, but there are some general things that most companies apply.

For example, some companies only allow you to convert a certain amount of the term life insurance plan, while others are able to convert the entire policy. Many of the regulations are similarly structured, where some people have either a shorter or a long time to activate the conversion. Because of this, it's important to be extremely transparent and encourage policyholders to ask any questions that they may have.

Who convertible life insurance is best for

So who is convertible life insurance for in the first place? It's one of the best options for those who are not sure if they might want to switch to a permanent insurance policy at another point in time. Another advantage is that, if someone makes the switch, they won't have to go through another round of medical underwriting, which simplifies the whole process. There are many other benefits to adding convertible coverage to a life insurance policy, which we can expand on.

Here are some common reasons that many people seek convertible life insurance coverage:

  • Timelines are uncertain: The client may be unsure of how long they want their term coverage to be. This choice means that they can change it if they become more certain in the future.
  • Cost-effectiveness: Renewable term life insurance is usually more affordable than whole permanent life insurance policy, and the same is true as the client gets older; the cost of insurance increases.
  • Health problems: In some cases, the policyholder may be concerned about potential health issues and the conversion to whole life insurance could provide their family with a larger potential payout than a term life insurance policy. 

There is some risk associated with convertible life insurance for insurance companies, which is why it's important to keep a close eye on those to who the company qualifies. Sometimes this can be confusing because it's different than other types of risk assessment. This is where actuaries come into play, and Lewis & Ellis offers many different services that can be useful. Here are some examples:

  • Appraisals and projected cash flow
  • Life insurance management
  • Assist with medical evaluation of in-force and new business policies.
  • Identify potential partners for third-party administration.
  • Identify potential purchasers for a portfolio.
  • Provide LE*SETTLEWARE™ Life Settlement Pricing Tool

These are just a few examples of how working with professionals who have the tools to boost you ahead of the competition is valuable. This is especially true when it comes to working with convertible term life insurance, which is a unique insurance product.

If you are ready to get started and work with an actuarial firm that has years of experience in the marketplace, reach out to Lewis & Ellis today to get started.



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