What Is Conversion Privilege in Insurance?

Understanding Conversion Privilege

Conversion privilege in insurance is a policyholder’s contractual right to change one type of insurance policy to another without new medical underwriting or evidence of insurability. It allows individuals to maintain coverage even if their health status has changed, ensuring they remain insurable regardless of new health conditions.

This right must be exercised within specific timeframes. For example, when group coverage ends, policyholders often have 30 or 31 days to convert to an individual plan. Term life policies usually specify a period or age limit before expiration for conversion to a permanent policy.

Premiums for the new, converted policy are calculated based on the insured’s age at conversion and the type of new policy. This results in higher premiums, reflecting the older age and often the more comprehensive nature of the new coverage.

Many insurance policies, especially group life and health, and convertible term life, offer this privilege. It makes a policy more adaptable, safeguarding policyholders as their life circumstances and health needs evolve.

Common Scenarios for Conversion

Group to Individual Policy Conversion

Conversion privilege is often used when an individual transitions from a group insurance policy to an individual one, typically after leaving employment or an association. When group coverage ends due to job termination, retirement, or reduced work hours, conversion allows securing a comparable individual policy. This is particularly beneficial because it guarantees continued coverage without a new medical exam, which can be challenging if health has declined.

This conversion prevents gaps in insurance coverage, ensuring that individuals and their dependents remain protected. Policyholders typically have a limited period, often between 30 and 60 days from the date their group coverage ends, to apply for this conversion. Failing to meet this deadline can result in the permanent loss of the conversion right, necessitating a new application process that would include full medical underwriting.

While options like COBRA (Consolidated Omnibus Budget Reconciliation Act) provide temporary continuation of group health coverage, conversion privilege offers a long-term solution by allowing the policyholder to obtain a new, individual policy. The new individual policy may have different terms and higher premiums compared to the group plan, but it provides continuous, guaranteed coverage.

Term to Permanent Life Insurance Conversion

Converting a term life insurance policy into a permanent form, such as whole life or universal life, is another common scenario. Term life provides coverage for a specific period, and conversion transforms this temporary protection into lifelong coverage. This conversion can be executed without additional medical underwriting, even if the policyholder’s health has deteriorated.

Benefits of converting term to permanent life insurance include the new policy’s potential to build cash value on a tax-deferred basis, accessible later through loans or withdrawals. This cash value and lifelong coverage mean permanent policies have significantly higher premiums than term policies. The premium for the converted permanent policy is based on the insured’s age at conversion, making it more expensive than the original term policy.

Most term policies offer this conversion option, specifying a conversion period, such as the first 10 to 20 years or before a certain age. Exercising this privilege ensures individuals can maintain life insurance protection for their entire lives, adapting coverage to evolving financial goals and ensuring financial security for beneficiaries.