What Is a Convertible Insurance Policy?

A convertible insurance policy is a type of temporary term life insurance that can be turned into permanent life insurance that will not expire. You can switch coverage at a future date without having to undergo a new health screening process. Convertible life insurance gives you the option to buy low-cost temporary coverage now while keeping your options open to buy lifelong coverage later.

Term versus Permanent Life Insurance

Term life insurance provides you coverage for a given number of years before it expires. Convertible term allows you to exchange your term temporary coverage for a permanent policy at a later date. While term premiums are less initially expensive, you need to pay more each time the term expires for a renewal. The coverage also does not last your entire life.

Permanent insurance (such as whole life and universal life) costs more than term but the coverage does not expire so long as you keep paying the premiums. Whole life policies also charge the same premium the entire time, so your future cost will not go up. Permanent policies can include a savings component that accumulates cash value tax-free, which you can access through loans or withdrawals.

How a Convertible Insurance Policy Works

A convertible life insurance policy allows you to obtain less expensive term coverage today with the option to convert it to a permanent policy at a later date with the same death benefit. This can be a valuable alternative if your insurance needs, financial resources, or medical situation change in the future.

You can also avoid potential medical underwriting issues with a convertible policy. You are not required to take any new or additional screening at the time the policy is converted, regardless of your medical condition.

When you convert, the insurer cannot increase the cost based on your health status. You receive the same health rating as when you first signed up for coverage, even if you develop health problems later. However, the cost of the permanent coverage will be based on your age when you convert. It will be more expensive than if you had bought the permanent life insurance policy at the beginning rather than buying term and converting later.

Policy Conversion Options

Most convertible insurance policies allow policyholders to convert the policy for a predetermined number of years (say 10 or 20 years). You decide if and when to convert during this window. When you convert a term policy to whole or universal life, the new permanent policy can have up to the same death benefit as the term policy. However, premiums for the new policy will be higher after conversion because permanent insurance is more expensive than term.

The conversion option may be part of the basic insurance contract, or it might be available by buying a special rider and attaching it to your policy. Some insurers offer the conversion option for the first few years of the policy at no charge and then provide the opportunity to add a conversion rider later only for an extra cost.

Some insurance companies allow you to convert a portion of your term life policy to permanent coverage while retaining the rest of your term coverage. For example, if your term policy has a face amount of $50,000, you might convert $30,000 to whole life and retain a $20,000 term policy. This allows you to keep some low-cost term coverage while leveraging the advantages of permanent life. Other companies allow you to "ladder" the conversion, such as converting 20% of your term face amount every five years until the entire death benefit is under the permanent policy.

Most conversion insurance policies specify a set number of years during which you are allowed to convert to permanent coverage without a medical exam. If you wait past this point, you lose your option to convert. Note that you don't have to use your conversion option. If you never convert and outlive your term, you simply lose your life insurance coverage.

Convertible Insurance Suitability

Buying a convertible insurance policy makes sense if you can only afford a less expensive term policy today but think you might like permanent insurance later. You can protect your loved ones with insurance immediately while keeping the option to switch to permanent coverage when you can afford it. On the other hand, if you want permanent coverage and can afford it right away, it might be better to get that set up as soon as possible. The premiums will be lower when you buy at a younger age versus converting at an older age later. You also build up more cash value by buying permanent coverage earlier. Finally, if you don't think you'll ever convert, ask the insurer whether this feature costs extra. You wouldn't want to pay more for a conversion rider you'll never use.

The Bottom Line

Buying a convertible insurance policy provides you with numerous options to modify your future coverage without worrying about possible changes to your health. However, term conversion policies may cost more than ordinary term coverage. You should also weigh the costs of switching to a permanent policy. Consult an insurance agent to understand the tradeoffs between cost and flexibility before making any decisions.