The conversion option or privilege is a contractual benefit of most term life insurance policies. It is the privilege of converting (exchanging) all or part of a term life insurance policy into a permanent life insurance policy. This privilege comes with options, as well as with limitations and restrictions.
- OPTIONS AND FEATURES:
- Some policies allow partial or full conversion. The policy might say, ‘…You can convert all or part of the term insurance…’ The part of the term policy that is converted will end when the new policy begins. For example: $ 100,000 of a $ 500,000 Twenty year level term (20 YLT) is converted to a whole life or universal life plan four years after the initial purchase of the term policy. The owner will then have a $ 100,000 permanent policy; and $ 400,000 on their 20 YLT with 16 years remaining of guaranteed level premiums.
- Conversions are made ‘without evidence’ or ‘proof of insurability.’ If the exchange is made within the proper time period, then no health questions or exams are necessary. The insured is guaranteed the same ‘rating’ or health class that is on the original term policy.
- Some policies allow conversion to ‘any permanent life products available …at the time of conversion.’ (‘available’ through that insurance company)
- Many insurers offer ‘conversion credits’ or ‘Premium credit.’ This credit is a small refund of premiums paid, which is credited towards the first year’s premium of the new permanent policy.
- Some policies allow either ‘original age’ or ‘attained age’ conversions. Original age term conversions are based on the age that the insured was when the original term policy was taken out. Under this type, all back premiums must be paid. This is done by someone wanting to reduce their premiums by locking in at a lower age. Attained age term conversions are based on the insurance age (many insurers go by nearest birthday) of the insured at the time of the conversion.
- LIMITATIONS AND RESTRICTIONS:
- Some conversion privileges restrict the conversion to specific or ‘selected permanent plans issued at the time of conversion by the Company…’
- The conversion must be made within a limited amount of time. The policy may say, ‘…the final date for conversion is the 10th policy anniversary or age 65, whichever is earlier…’
- Some riders, such as Accidental Death Benefit or Waiver of Premium, may only be converted without evidence of insurability if done during the first five years of the original term policy.
- Many life insurance companies require a ‘Minimum Conversion Amount.’ Most carriers offer permanent plans with face amounts as low as $ 10,000 or $ 25,000.
|Before buying a life insurance policy, the buyer should gain a general understanding of the plan which they are purchasing. Additionally, the buyer should be comfortable with the carrier or life insurance company issuing their policy. The buyer might ask, ‘Does this carrier sell more than one type of life insurance product?’ And if so, ‘What kinds?’|
- FOR MORE INFORMATION (see the following articles):
Your Life Insurance Choices – This article addresses the structure and differences of life insurance plans, some purposes for their design, and looks at questions you could ask to help determine your choices.
How are Life Insurance Companies rated? – This link introduces the main rating agencies of life insurance companies, and explains the various ratings given by these agencies.
How strong is my life insurance carrier? – This page briefly looks at certain factors that very strong insurers have in common.