What Is a Conversion Period in Life Insurance?
Understand the life insurance conversion period, a key policy feature offering flexibility to change your coverage type.
A life insurance policy provides financial security for beneficiaries. While term life insurance offers coverage for a specific period, some policies include a “conversion period.” This option allows policyholders to adjust their coverage as life circumstances evolve, helping them meet long-term financial planning needs.
Understanding the Conversion Period
A conversion period defines a specific timeframe during which a policyholder can change their life insurance coverage without undergoing new medical underwriting. This feature is primarily associated with term life insurance policies, which provide coverage for a predetermined number of years, typically ranging from 10 to 30 years. Its purpose is to offer policyholders a window to secure lifelong coverage, particularly if their health has changed since the initial policy was issued.
The duration of a conversion period can vary significantly among insurers. Some policies may allow conversion throughout the entire term, while others limit the option to the first few years, such as five or ten years. There may also be an age limit for conversion, with many insurers setting a maximum age, often around 65 or 70. Policyholders should review their specific policy documents to understand the exact terms.
How Conversion Works
Exercising the conversion option typically involves changing a term life policy into a permanent life insurance policy, such as whole life or universal life. This transition is valuable because it usually does not require new medical underwriting, even if the policyholder’s health has changed since the original policy was issued. This allows them to secure permanent coverage at their original health class rating, though the premium will reflect their current age.
Premiums for the new permanent policy are determined based on the policyholder’s age at the time of conversion and the type of permanent policy selected. While there is generally no direct fee to convert, permanent policy premiums are higher than term policies due to their lifelong coverage and potential for cash value accumulation. If the conversion option is not exercised within the specified period, the term policy will expire at the end of its term, and coverage will cease unless renewed at much higher rates. Policyholders may choose a total conversion, where the new coverage amount is the same as the term policy, or a partial conversion, allowing them to convert only a portion and maintain some term coverage.
Key Considerations for Conversion
When evaluating whether to convert a term life insurance policy, personal health is a significant factor. If an individual’s health has declined, converting without a new medical exam is valuable, securing coverage that might otherwise be unavailable or prohibitively expensive. Conversely, if health has improved, obtaining a new permanent policy might be more cost-effective.
Evolving financial needs and long-term coverage goals also influence the decision. Permanent policies offer lifelong coverage, beneficial for estate planning, final expenses, or leaving a legacy. They also accumulate tax-deferred cash value, accessible through withdrawals or loans. While permanent policies have higher premiums than term policies, they offer guaranteed premiums that do not rise with age and potential for cash value growth.