Automatically Convertible Term Life Insurance

What is Automatically Convertible Term Life Insurance?

Automatically convertible term life insurance is a type of life insurance that begins as a term life policy, then — as the name suggests — converts to a permanent policy automatically at a predetermined date.

Life insurance policy types

When it comes to life insurance, people generally chose from one of two main categories:

  • Term life insurance. These policies lock in fixed premiums in exchange for a fixed benefit for a certain amount of time, called the policy term. Someone might buy a 30-year term life insurance policy to get a set amount of coverage (e.g., $500,000, $1 million) with premiums that won’t change for the duration of the 30-year term. At the end of the 30 years, the policy owner can renew the policy, convert it into a permanent policy, or cancel coverage.
  • Permanent life insurance. Permanent life insurance lasts the insured’s lifetime. It also includes a cash value component, which is essentially a savings/investment account within the policy that the policy owner can use in specific ways.

Because term life insurance only locks in premiums for a set amount of time and doesn’t include a cash value component, it’s much more affordable than permanent coverage.

Converting term life insurance to permanent coverage

Many insurers include a conversion option with their term policies. This allows the policy owner to convert the term policy into a permanent one without going through any new underwriting.

After conversion, the policy premiums will increase to reflect the new, permanent nature of the policy. But that’s not the only reason the policy costs more. Even if the term policy owner decided to renew the policy for a new term, premiums would go up. That’s because at the point of renewal or conversion, the insurer considers the insured’s age. You get more expensive to insure as you get older because you have fewer years left to pay premiums, which help the insurer to offset the risk in insuring you.

All this said, whether people decide to renew a term policy or convert it into permanent coverage, they will pay higher premiums.

With some term life insurance policies, the option to exchange the term coverage for permanent coverage is only available during a predetermined conversion period. That means the policy owner needs to track the coverage and ensure that they don’t miss that opportunity.

That is, unless they have automatically convertible term life insurance. These policies take the legwork and pressure off the policy owner.

How automatically convertible insurance works

This type of term life insurance builds conversion into the policy terms. With automatically convertible coverage, the term life coverage switches to permanent coverage on a set date. It’s automatic, meaning the policy owner doesn’t need to do anything for that conversion to take place.

That can be helpful in maintaining coverage for the insured’s lifetime and ensuring the policy owner doesn’t miss the conversion period window. It does mean, however, that the policy owner needs to be prepared for higher premiums after the automatic conversion date.

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