Term life insurance policies are designed to provide temporary life insurance coverage for a specified period of time, or term length, typically between 10 and 30 years. After this period of time ends, the term expires, and the life insurance coverage can only be continued on an annual renewal basis with a premium that increases significantly (or benefit amount that decreases) each year.
However, most term life insurance policies include a benefit known as a conversion option, which allows the policyholder to change (convert) their term life insurance policy into a permanent life insurance policy.
How does a conversion option work?
When a policyholder exercises their conversion option, they can convert their term life insurance policy into a permanent life insurance policy without having to go through the life insurance underwriting process again. This means that they can get a new life insurance policy at their original risk rating, even if their health has deteriorated since they first took out their term life insurance policy.
In other words, while the cost of the new permanent life insurance policy will still depend on the policyholder’s age at the time of conversion, their current health and any negative changes in their risk factors will not affect their cost.
Since a permanent life insurance policy offers lifetime coverage and builds cash value, the new premium will likely be much higher than the premium for the original term life insurance policy. Nevertheless, it could still be lower than getting a new term life insurance policy and certainly will be lower over the course of a full lifetime if coverage is needed for that long. Not only that, the cash value that can grow inside of the new permanent policy can be used to pay future premiums.
Why is a conversion option important?
A conversion option is important because it allows you to extend your coverage beyond the initial term of your policy without having to re-qualify for a new life insurance policy. This can be especially valuable for individuals who have developed health conditions or facing other issues that would make it difficult to qualify for a new policy.
In addition, a conversion option can provide you with peace of mind if you have any concerns about still needing life insurance coverage beyond the length of time you are covered by the original term life insurance policy you purchased. By having a conversion option in your term life insurance policy, you can ensure that you will at least have the option to have life insurance coverage for the rest of your life.
When is it good to convert my term life insurance policy?
There are several situations when it may be a good idea to convert a term life insurance policy into a permanent life insurance policy:
- Your health has deteriorated since you first took out your term life insurance policy.
- You are concerned about outliving your term life insurance policy or still needing coverage after retirement.
- You learn that you have a need or financial interest in having lifetime coverage to leave an inheritance.
- You want to build cash value in your life insurance policy as a safety net for supplemental tax-free retirement income, long-term care expenses, or other financial needs.
It’s important to note that the decision to convert a term life insurance policy into a permanent life insurance policy should be based on your unique needs and circumstances. A financial advisor or life insurance expert can help you evaluate your options and determine whether exercising a conversion option is the right choice for you.
How to get the right life insurance policy
If you’re considering converting your term life insurance policy into a permanent life insurance policy, it’s important to work with a life insurance expert who can help you evaluate your options and make the right decision for your unique needs. At CEG Life Insurance Services, we offer personalized service and expert guidance to you to find the right life insurance policy for your needs and circumstances. Contact us today to learn more about how we can help you get the life insurance coverage you need.