You’re ready to take the plunge and protect your family financially by buying life insurance. What’s holding you back? You’re unsure about the type of policy you should get.
After all, you’ve read that term life insurance is your best bet because it’ll give you coverage during the years when you’ll need it. And it’s far more affordable than the permanent life insurance policy that would protect your family for the rest of your life.
But you can’t get rid of that nagging voice in your head that keeps saying “what if?"
“What if it takes much longer to pay off your mortgage than you think it will?"
“Or what if your kids end up struggling financially as adults and you don’t want to burden them with your funeral expenses?"
In short, what if your life doesn’t turn out the way you think it will and you end up wishing you had bought permanent life insurance instead?
Well, we’ve got good news: There’s a way to buy term life insurance now and have the flexibility to change your mind down the road.
How do you do this? Buy a convertible term life insurance policy.
What is convertible term life insurance?
If you’ve never heard of convertible term life insurance, you may wonder why there’s a complicated-sounding form of insurance that no one has ever told you about before.
But in reality, convertible term life insurance is just a term life insurance policy with a conversion option. It lets you convert some or all of your term life insurance policy into a permanent life policy so that your coverage lasts for your entire life.
When you have term life insurance, your policy covers your family for the number of years you selected when you bought the policy. If your policy is about to expire and you decide that you want permanent coverage after all, you can let your current policy lapse and then apply for a new permanent life insurance policy.
But if you apply for a new policy, you’ll probably have to undergo medical underwriting again. And if your health has declined since you bought your first policy, you’ll be stuck paying sky-high premiums for the new policy.
Buying convertible term life insurance gives you a way to side-step this second medical exam. How? Because when you convert a term life policy into a permanent life policy, you usually don’t have to undergo medical underwriting again. Score!
So in sum, convertible term life insurance gives you the option to have permanent life insurance coverage in the future without having to commit to it now or pay the price (literally!) of developing a health condition down the road. It’s sort of like a life insurance loophole.
Which Canadian term insurance policies are convertible?
If you’re looking for convertible term life insurance in Canada, it shouldn’t be hard to find. That’s because most term life insurance policies are convertible. So almost every insurance company in Canada will offer term life insurance policies that have a conversion option. This includes policies from Manulife, Sun Life, BMO, Wawanesa Life, and even the Canada Protection Plan.
In other words, you won’t be stuck choosing between a limited number of policies or insurers when you’re shopping around for convertible term life insurance. Good to know!
When should you convert your term insurance into permanent insurance?
Okay, so let’s say that you have convertible term insurance. How do you figure out if you should actually convert your term policy into a permanent policy?
Here are 3 key reasons why people convert their term insurance into permanent insurance:
You develop health problems
The most common reason why people convert their term policy into a permanent policy is because they develop a health condition while holding their term policy.
If your health declines after you buy a term life insurance policy and you think you’ll still need coverage when your policy ends, you’re much better off converting your current policy than applying for a new permanent policy. When you convert your policy, your insurer won’t assess your health all over again. This is a huge advantage because it means that the premiums you pay for your permanent policy won’t be affected by your current health.
For example, if you’re 50, reaching the end of your term policy, and have just been diagnosed with a rare cancer that will drastically shorten your life, it makes sense to convert your policy.
As we mentioned earlier, if you apply for a new permanent policy instead, your insurer will probably assess your health again, discover that you’re riskier to insure, and charge you expensive premiums to compensate. These premiums might even be so expensive that you’re unable to afford a permanent policy. Not what you want, right?
You want to protect your heirs from estate tax
Worried about the tax your heirs will owe on your estate after you pass away? You can shelter them from this burden by converting your term insurance into permanent insurance.
Unlike a mortgage or car loan, estate tax isn’t something you can pay off earlier in life while your term policy is still in effect. By definition, the taxman won’t have you pay up one last time until you pass away and your final tax return has been filed. But if you convert your term policy into a permanent policy, you can make sure that there’s money set aside for your heirs to use to cover the taxes.
You can afford it now
Maybe you’ve always wanted to set aside money for your funeral expenses so that your family has one less thing to worry about when you pass away. When you first bought life insurance, though, you were young, living in a tiny place, and just barely making enough to get by. So a term policy was all you could afford.
But now that you’re older, more established, and able to afford more than mac and cheese dinners, you can cover the cost of those higher permanent insurance premiums.
The big selling point of convertible life insurance is that it lets you get permanent coverage later on in life without running the risk of paying sky-high premiums if your health declines while you have your term policy.
But if you’re considering conversion and are still pretty healthy, it makes sense to get quotes for a new permanent policy too. When you compare them to what you’d pay through conversion, you might find that you can get a better deal with the new policy (even if it means getting poked and prodded a second time).
What to look for in a convertible term life insurance policy
Ready to buy a convertible term life insurance policy?
Here’s what to look for:
- Verify that the policy is convertible. Most term policies are, but it’s always better to double check and be safe rather than sorry.
- Understand when you can convert. Some policies have restrictions on when you can convert your policy (e.g., a particular timeframe each year).
- Know the deadline. Be aware of when you have to convert by if you want to convert. This is usually before your policy expires or before you reach a certain age.
- Check the features of the permanent policy. If the info is available, look into the features of the permanent policy that you’d be able to convert to.