As a life insurance expert, I often get asked about convertible term life insurance. It's a popular option for those who want to have the flexibility to convert their term life policy into a permanent life policy at a later date. Unfortunately, in too many situations, policyholders either forget about the option to convert or they did not really understand the feature when they bought their policy.
In the past, I have written about how most consumers should not buy term life insurance and, instead, if at all financially feasible, purchase a permanent, cash value policy. I stand by this, but I did give some examples of when a term purchase may be sufficient and defined the prevailing reason for buying term coverage:
Term insurance is for a contingency:
If you die and your spouse needs income replacement
If you die and your children will need funds for education
If you die and business debt is outstanding
Beyond these succinct ‘rules’, a term buyer should make sure their policy is convertible because it can make future financial planning much easier.
What is Convertible Term Life Insurance?
Convertible term life insurance is a type of term life policy that includes a conversion option. This means that the policyholder has the option to convert their term life policy into a permanent life policy without having to go through the underwriting process again. This is a huge benefit since most people are not any healthier than they are right now. The conversion option is typically available during a specific period, which is usually within the first few years of the policy.
How Does Convertible Term Life Insurance Work?
Convertible term life insurance works similarly to traditional term life insurance. The policyholder pays a premium for a set period, and if they pass away during that period, their beneficiaries receive a pre-determined death benefit. However, with convertible term life insurance, the policyholder has the option to convert their policy into a permanent life policy at any time during the conversion period.
The conversion option is beneficial because it allows the policyholder to lock in their insurability. If the policyholder develops a health condition that would make it difficult to obtain a new policy, they can convert their term life policy into a permanent life policy without having to go through the underwriting process again.
Why Should You Consider Convertible Term Life Insurance?
There are several reasons to consider convertible term life insurance:
Flexibility: Convertible term life insurance gives you the flexibility to convert your policy into a permanent life policy if your needs change.
Insurability: If you develop a health condition that would make it difficult to obtain a new policy, you can convert your term life policy into a permanent life policy without having to go through the underwriting process again.
Cost-effective: Term life insurance is typically less expensive than permanent life insurance. By choosing a convertible term life policy, you can enjoy the lower premiums of a term life policy while still having the option to convert to a permanent life policy at a later date.
Considerations for a Life Settlement Transaction
Another consideration for deciding whether to take advantage of a conversion option is the ability to make some money if the coverage is no longer needed. This may be accomplished through a life settlement transaction.
A life settlement transaction is when a policyholder sells their life insurance policy to a third party for a lump sum payment. If you're considering a life settlement transaction for your convertible term life policy, there are a few things to keep in mind. First, not all life insurance policies are eligible for a life settlement transaction. Typically, the policy must have a death benefit of at least $100,000 and be in force for at least two years.
Second, if you're considering a life settlement transaction, you should be aware that the lump sum payment you receive will likely be less than the death benefit of your policy and there may be tax implications. The amount you receive will depend on several factors, including your age, health, and the terms of your policy.
Finally, if you do decide to sell your policy, you will no longer have coverage. This means that if you pass away, your beneficiaries will not receive a death benefit.
Keep Your Options Open
Convertible term life insurance is a great option for those who want the flexibility to convert their term life policy into a permanent life policy later. It's important to consider the conversion options and the potential for a life settlement transaction before choosing a policy. At Life Insurance Strategies Group, we do not sell life insurance products. We help our affluent individual and institutional clients make decisions involving complexities around life insurance.
Since its inception, Life Insurance Strategies Group has solely focused on the individual high net worth life insurance market. We do not sell products. This allows us to offer unbiased, pragmatic advice. Visit us at www.lifeinsurancestrategiesgroup.com.