I’d previously covered the ‘renewable’ part of Renewable and Convertible (R&C) term life insurance. In this post I’m going to discuss the convertible part of the product.
First, this conversion priviledge is essential. I never recommend a term policy that does not have this. While most companies offer this on their term insurance policies a few do not. This benefit is provided free of charge. Do not buy a term policy that does not have this option available to you. This feature is not something that you’ll likely need - but if you do need it, it becomes everything. This feature is the most underrated option on term insurance in Canada yet it’s a total life saver if you actually need it. It’s the failsafe for your term policy.
What the conversion priviledge does is simple. It lets you trade in your term insurance policy for a permanent life insurance policy without a medical exam. Both the first and last part of that phrase work in conjunction - changing from term to permanent, and doing so without a medical exam. (Note that there is an age limit to doing this; age 70 is common. After that age the feature expires.
Let’s say you’ve bought 20 year term life insurance because you know that in about 20 years you won’t need the insurance and are planning on dropping it. That’s the case for most folks with young families and mortgages - both of which tend to disappear in roughly 20-30 years (at which point they don’t need to be covered anymore). That’s great - if things go well we’re done.
But let’s look out 20 years. In 20 years time, at the renewal of your term life insurance policy there’s three options available to you.
The first is that things have happened as planned. Kids are gone, mortgage paid, we don’t need the insurance. So we drop it. Fair enough.
The second possibility is that something’s changed and you decide you still need an insurance policy. If you’re healthy, the solution is easy enough. Shop around from a life insurance broker, find an inexpensive company and take a new medical exam.
The problem arises in scenario 3. Let’s say you’re 20 years out and decide you still need the insurance - but you’re unhealthy and can’t get a new policy. You’re faced with enourmous price increases at renewal with your term insurance policy. So you still want insurance but have these huge premiums.
Solution? Enter the conversion priviledge. At that point (assuming you’re still younger than the expiry age of this feature) you can simply hand in your term policy and demand a permanent life insurance policy…with no medical exam! It doesn’t matter if you’re so ill that you crawl in on your hands and knees. The insurance company is guaranteeing that you can purchase a permanent insurance policy at that time. AND you’ll get the same rates as someone who just bought a permanent insurance policy, has just taken a medical exam and received regular rates.
See how much of a lifesaver this is? When everything else goes wrong, we’re unhealthy, can’t get insurance, it’s 20 years later and in retrospect we wish we’d bought permanent insurance, the conversion priviledge is going to save our bacon. And since this feature is available for free from most companies (but not all), you can see why I only recommend term products from companies that have this feature.
There’s also another common use for this feature. Many folks at renewal decide they don’t need a large term insurance policy. But also at renewal some folks decide they’d actually like a small permanent insurance policy. Just something that will cover funeral and final cleanup expenses, or something small to leave to someone. Yet now you’re approaching retirement and while not unhealthy you may have less than perfect health. Maybe a bit of cholesterol or high blood pressure - whatever. The conversion priviledge also fits that scenario. It’s straightforward to convert your term insurance policy to a permanent insurance policy, then decrease the face amount down to something smaller. Now you have a small face amount permanent life insurance policy that’ll last you the rest of your life.
A couple caveats to all of this. Well, not so much caveats as footnotes. While the ability to convert is a contractual priviledge, what’s available to convert to is not. You’ll be converting to whatever permanent products are available in the future and we have no idea what those products will be. So that is one risk. The second thing to remember is that you’ll be converting based on your future age. Clearly that’ll be more expensive than buying it now (since life insurance costs more as we get older). The trade off is that you get to defer paying those premiums until much later as well as deferring the decision to even pay those premiums until much later.