The one downfall to a term life insurance policy is that it is only for a specified period of time.
Once the term comes to an end so does the coverage.
It can be great to no longer have to pay your monthly premium but if you are still in debt and need coverage this can be quite the predicament.
Life Insurance companies developed a term conversion rider to help policyholders who are in these types of situations.
What Is A Term Conversion Rider?
A term conversion rider allows a term life insurance policyholder to convert their term policy to a permanent (whole life or universal life) policy before the term ends.
Most life insurance companies have this rider built into their term policies for free to give policyholders the option once their term concludes. However, some companies do not offer this rider on all term policies so make sure you review a policy before you purchase it for this rider.
How Does It Work?
Life insurance companies that do allow you to convert your term policy to a permanent policy may only allow this decision to be made at a certain time in your policy.
For example, some companies only allow the conversion rider to be utilized within the first 5 years of the policy, while others are within the first 20 years, some companies allow it to be used at any point in the term.
Converting your term policy to a permanent policy is a big decision that needs to be evaluated carefully.
Who are Term Conversion Riders Best For?
It may seem like the advantages of this coverage may outweigh the disadvantages but this is not the case for most policyholders.
It is completely normal to want to be covered for your entire life, the matter of the fact is that it is too expensive.
Making monthly payments that are 5 times the amount of what you were paying for the same amount of coverage is not practical. It makes much more sense to purchase another term life policy and invest the difference if you would like to be covered.
This strategy is proven to make much more financial sense.
This type of rider is only beneficial to policyholders who need the protection. Like the example, we talked about earlier where the term life policyholder developed cancer 5 years into his term.
Situations like that are where people will get the most bang for their buck with this type of rider because they are at a higher risk of dying if their policy expires.
A change of profession may also make this rider more practical but even in that scenario a term policy that covers you for your entire career can be a sound solution.
This rider is best if your life is at a greater risk of death even when the term concludes.
Pros and Cons
The Term Conversion Rider gives you a choice to choose to change your coverage from a term policy to a permanent policy.
If you still need coverage at the end of the term this rider gives you the ability to maintain it.
When it comes to your financial future you always want options and this rider is a great one to have.
2. No Underwriting
This is by far the greatest benefit of this rider. The term conversion rider does not require policyholders to go through the underwriting process again. This means that policyholders do not have to get another medical exam.
For example, if you purchased a 15 year term life policy at age 30 while you were healthy your premiums would be low as you are at a low risk of death.
But if you develop cancer 5 years later at age 35 you are at a much higher risk of dying. You may want to be covered for the entire span of your life. Using the term conversion rider you can convert your term policy to a permanent policy without having to undergo any additional health screenings.
Age is taken into consideration when converting a term policy into a permanent policy but the health of an individual is already accounted for from prior examination.
3. Permanent Coverage
There is no such thing as too much coverage. Converting your term policy to a permanent policy can keep your mind at ease.
The only thing that matters is leaving your family financially stable. The last thing you want is to not have coverage and leave your family with a pile of bills.
Permanent coverage protects your family from any surprises that may arise.
1. More Expensive
Although permanent coverage is great to have life insurance companies do not offer this for cheap.
Premiums are much more expensive compared to a term life insurance policy. Permanent life insurance premiums can cost 5 times more than a term life premium payment.
Not only are the payments more expensive but this contract is tied to you for the rest of your life. There is no longer a date that you can stop making payments.
For permanent life insurance, the payments are much more expensive and require you to pay for a longer period of time.
2. Invest the Difference
A common strategy for life insurance policyholders is to purchase a term life insurance policy and invest the difference in the stock market.
If you can get a return rate of 10% annually on your investments, your portfolio will generate enough funds to cover any situation that may occur when your term concludes.
Best Term Conversion Rider Companies
The following rates are based for a 5 feet 9 inches tall 50 year old male in good health. The policy is a 20 year term life insurance policy with a death benefit of $500,000.
The policyholder is 50 years old to demonstrate the amount term life insurance cost at an older age compared to a permanent policy.
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These monthly prices are fair to pay for life insurance at an older age. They may seem expensive compared to the price you may have paid for a term prior if you purchased life insurance at 30 years old initially as many people do.
Insurance companies may not do another medical examination if you convert policies but they do take into consideration your age.
For a 50 year old male in good health, a permanent life insurance policy can cost $601 per month. That is an astronomical amount to pay monthly for the rest of your life.
Financially it makes much more sense to purchase an additional term if you are still in good health rather than pay a large premium for permanent insurance.
A term conversion rider is a great option to have available for certain circumstances, get a quote and speak to a life insurance agent to find out what fits you best!