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What Is a Convertible Insurance Policy?

A convertible insurance policy is a term related to life insurance. Term life insurance is a policy that provides the insured person coverage for a certain period of time. On the other hand, a “whole” or “universal” policy is considered permanent, providing coverage for the entire life of the insured. Now, a convertible term policy allows the insured to convert a term policy to a permanent policy at a later date.

Key Takeaways

  • Convertible insurance policies allow insureds to convert a term policy to a permanent policy.
  • The conversion can happen as long as the conditions of the policy have been maintained and payments made on time,
  • No new or additional screening is required either (assuming payments and other conditions are maintained).

How a Convertible Insurance Policy Works

As long as the conditions of the policy have been maintained and payments made on time, the insured person is not required to undergo any new or additional screening at the time the policy is converted, regardless of his/her medical condition.

This type of policy provides the benefit of obtaining less expensive term life insurance now while maintaining the option to convert to a permanent policy at a later date as insurance needs and financial resources change.

Special Considerations

Most convertible insurance policies allow policyholders to convert the policy for a predetermined number of years. This possibility allows for saved expenses on buying a new policy. Now converting a policy from term to whole means the new permanent policy concerts with the same value as the term policy. However, the premiums for the policy will be higher after the conversion, as you’re going from a term to a whole policy. 

The biggest benefit of convertible insurance policies is that policyholders don’t have to undergo medical underwriting again to switch to permanent.

Buying a convertible insurance policy makes sense for insureds if they can only afford a less expensive term policy. When buying insurance, permanent insurance tends to always be more expensive than term insurance. Note that most conversion insurance policies have a conversion deadline.

Advisor Insight

Scott Bishop, CPA, PFS, CFP®
STA Wealth Management, LLC, Houston, TX

A convertible policy can be converted into another type of insurance policy at the same insurance company. The conversion privileges are stated in the policy. The exact policies that it can be converted into will be stated by the contract and insurance company. Typically, convertible insurance deals with a level-term insurance policy that can be converted into a permanent/cash value policy that may be some form of whole life or universal life. The contract will state how long the convertible options can be done. One of the benefits is that although it gets converted at the age you convert it, the policy converts at the same health rating as when you applied for it. Make sure to understand the conversion options before you choose the term insurance policy and carrier.