There is a provision available with many term life insurance policies that many people are not aware of. And because it costs a little bit extra, they will likely pass on it even if they are made aware of it. It’s the term life conversion option, and it could be the single best method available to overcome the limited duration of term policies.
What is the Term Life Conversion Option?
Simply put, the term life conversion option gives you the ability to convert your term policy to a whole life policy at specified dates during the length of your term. This will enable you to turn your term policy – which is temporary coverage – into permanent coverage.
The biggest advantage of this option is that it removes medical condition as a factor in determining the continuation of your coverage. You will be able to convert your term policy to a whole life policy without having to undergo a medical exam.
Where this becomes particularly important is when you experience a decline in health after taking your initial term policy. Your health condition – for example, a heart condition – could be a barrier to your getting affordable life insurance once your term policy expires. If you have a conversion option, and you exercise it before your term policy expires, you’ll be able to maintain continued coverage despite the fact that your health has declined.
This is a way of protecting the health rating that you had when you first took your term policy, which is generally when you are young and very healthy.
Exactly when you can convert a term policy under this option depends upon the insurance company and the specific policy. Some policies will allow you to convert any time while your term policy is in force. Others will only let you exercise the option up to a specific date, which can be well before the policy expires.
The Downsides of Adding the Conversion Option
If you do consider the conversion option, you should be aware that it’s not without a downside or two, so you’ll have to weigh out the benefits carefully.
Price is one factor. Since you’ll be getting an enhanced benefit as a result of the conversion option, you will pay extra premium to have it. But it’s a relatively inexpensive way to make sure that you will be able to maintain life insurance after your term policy expires.
Bad memory could be another issue. Since term policies run for many years, you may forget that you have a conversion option, or when you need to exercise it. Forgetting that you have it could be the equivalent of not having it.
Though condition of your health won’t be a factor in the pricing of your premium upon conversion, your age will be. The insurance company will assess the premium based on your age at the time of conversion. Naturally, this will mean that the premium will be higher than what it would be for your term policy (because you were younger when you took it). But let’s say that you buy a 20 year term policy at age 30, and convert it at age 45. By that age, you may be in a better financial position that will enable you to afford a higher premium than you could when you first took the policy.
The Achilles Heel of Term Life Insurance Policies
Generally speaking, you will always be better off with a term policy than whole life. This is because not only is term less expensive than whole life, but it’s far less expensive. Also, the highly touted investment provision in whole life is greatly overrated. It really is true – you are better off to buy term and invest the difference. A no-load index mutual fund will easily outperform life insurance related investments over the long-term.
But the built-in weak spot – the Achilles’ heel – of term life insurance policies is that eventually the term will come to an end. Some term policies will allow you to renew your coverage, but they will adjust the premium for age, and often for medical condition.
The conversion option allows you to add in a work-around, at least as far as medical considerations are concerned. And since a lot can happen with your health over a space of 20 years, the conversion option is a nice feature to have.
A Term Policy With a Conversion Option Can Be the Best Life Insurance You Can Have
A term life insurance policy with a conversion option can be something close to the best of both worlds. It will offer the low price and high death benefit that you’ll need early in life when money is tight. But it will also provide you with the ability to switch to permanent insurance later on in life when your health may not be so certain.
Though getting life insurance coverage and doing so at the lowest possible premium rate is usually the driving force for most people, you should spend some time seriously considering what options may be available when the term of your policy is up. A competent life insurance agent can help you do just that.
Whether he offers you a conversion option, guaranteed renewability, or some other provision that will protect your insurability when the term policy expires, you owe it to yourself and your family to fully explore these options. A deeper discussion, and a small increase in your premium, could provide you with a lot of options later on in life that you won’t have otherwise.
