When it comes to affordable life insurance, Term Insurance is what most people think of. Term life insurance is super affordable and is a great solution for young adults that want to make sure they leave enough money to their surviving loved ones to replace the loss of your income.
It’s important to remember, however, that term life insurance provides temporary coverage and will eventually expire. Even though you can purchase a 30-year policy, sooner or later it will expire and if a renewal is offered, it will be based on your current age and will likely be unaffordable.
Smart financial advisors who recommend term insurance as an affordable solution to protect against financial disaster will likely warn clients that term life insurance is a temporary solution for a permanent risk. The key is that term policyholders need to convert all or part of their term insurance before it’s too late.
The term conversion clause (or conversion privilege) is written into most term policy contracts. It kind of gives you a “lease with an option to buy” choice in your term life insurance policy. The terms and conditions of the conversion option are not the same with every company so it’s important to understand before you purchase your policy when the conversion option is available.
The way the conversion works is actually very simple. It allows the policyholder to convert some or all of the death benefit into a permanent policy like whole life or universal life without having to go through medical underwriting. It’s a big deal and policyholders should understand how it works and when it can work.
The best way to explain how term conversion works is to provide a hypothetical example:
Fred Winslow is a 30-year-old married male with two children and purchases a $500,000 term life insurance policy to make sure his surviving loved ones are okay financially if he dies unexpectedly. Fortunately for Fred, his independent agent made certain that his policy has the conversion privilege and took additional time with Fred to explain how it works. Fred’s policy term is 30-years which means he will be 60-years-old when it expires.
Fred knows that he must convert his policy before it expires and that there will be no medical underwriting. Fred assumes that he may not need as much life insurance at 60 so he plans to convert only half the face amount into a universal life policy that his insurer offers. So, at age 60, Fred will be able to purchase permanent cash value life insurance that will cover him for the rest of his life.
The most important part of this example is that Fred’s independent agent made sure that Fred purchased a policy that included the conversion privilege and took the time to explain it to him. In fact, Fred’s insurance company will automatically send him a warning notice when he starts getting close to the conversion cut-off thereby helping Fred not to ask for the conversion when it’s too late.
Since not every company sends out “conversion warnings” to their clients, and insurance agents come and go, it makes sense for policyholders to contact their agent’s office to arrange for policy review every year or so. Life events happen to everyone and it’s not unusually for a policyholder to need more life insurance during their lifetime.
It also makes good sense to convert your term insurance sooner rather than later because the policy you convert to will cost less if you don’t wait until the last minute. Permanent life insurance rates are based on age, health, and death benefit. Even though you don’t have to be concerned about the “health” part, you can save money purchasing your permanent policy earlier than your term expiration date. It also makes sense to convert your term coverage after you have reduced your debts and do not need as much life insurance as you are currently carrying.
Specialty policies are insurance policies that are purchased for a specific purpose like mortgage protection insurance, divorce-related coverage, or coverage required by a lender. Ordinarily, these are normally 10, 20, or 30-year policies that most people do not renew. Well, guess what? You can convert these types of policies as well (if they contain the conversion privilege) and use your conversion rights to get more permanent insurance without having to deal with the medical underwriting.
The most important thing to remember is that not every term policy offers the conversion privilege and it doesn’t make sense to buy one unless it does. Term insurance can be a great solution for adults who are growing a family and accumulating debt, but sooner or later, everyone is going to need permanent life insurance to carry them through the rest of their life.
Here are some additional articles about term insurance that we encourage you to review:
It’s important for insurance shoppers to understand that term insurance is popular because it’s cheap. It’s cheap because it’s temporary and the insurers rarely have to pay a claim. Smart term policyholders also know that conversion is a better option than renewing and that permanent coverage is your moment to act on the “lease with an option to buy.”