3 June 2014 0 Comments

The Meaning of Renewable and Convertible

shutterstock_165314960Term insurance may be referred to as “Renewable” and “Convertible.”  What do these terms mean?

Renewable

Level Term Insurance has a Level Death Benefit and a Level Premium, but the premium is only level for a specified period of time.  Thus, a 20 year term policy’s premium will be level for 20 years.  At the end of that time, if the policy is Renewable, it may automatically be continued for the original face amount by paying an increased premium.  The increase will be substantial.  Typically, the premiums will take a huge jump in the 21st year and continue to increase every year thereafter.  The Renewability will generally be allowed up to age 100, but some policies may cap it at age 85. 

The Renewable feature of a term policy is generally only attractive to an insured who has made no provisions for another policy prior to the end of the Level Premium period and whose current health or other factors affecting insurability have deteriorated significantly resulting in a very short life expectancy.

Convertible

Term Policies that are convertible may be exchanged for a Permanent Policy without providing any current information about health or other factors affecting insurability.  The permanent policy will be issued for a premium based upon the insured’s then current age in the same premium class for which he/she originally qualified.  Thus, a person who purchased a 20 year term policy at age 45 and was classified as a Preferred Non-Smoker who decides to convert in the policy’s 15th year will be issued a Permanent Plan of insurance available for an age 60 Preferred Non-Smoker.  The individual may have taken up smoking and had two heart attacks following the issue of the term policy; the Permanent policy will still be issued with a premium for a Preferred Non-Smoker.

The right to convert may extend for the duration of the Level Premium purchased.  However, some policies might restrict the conversion feature to the first 5 or 10 years of the term and the renewability of all term policies will not extend beyond a given age, such as 65 or 70.

Although the premium required to convert term to a permanent policy is more in the first few years than the premium required to renew term, it won’t be many years before the cumulative cost of renewing term exceeds the cost of a permanent policy.  The right to convert can be important for long range planning when the insured has incurred some health history over the years.

The Renewability and Convertibility features of term insurance can be as important in selecting the best policy for your needs as is the most competitive premium.

Next…a look at the roll life insurance played in the lives and estates of some famous people.

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