The definition of term insurance is a life insurance policy that has a predetermined period of coverage, typically stated in number of years, with a defined benefit paid as long as the claim is submitted before the date when the policy coverage has been completed. Term policies are not very flexible, which is one reason the coverage is more price competitive than whole life, universal life or variable life. Since the length of coverage and the benefit are defined, the insurance carrier’s exposure to loss is both manageable and predictable.

In order to enhance the marketability of term life insurance and provide for more flexibility regarding a policy holder’s changing circumstances, carriers have introduced a convertible term life product that allows a policy holder to convert the face value of the term policy into a permanent life insurance policy. Convertible policies can be transferred into permanent life insurance coverage, such as whole life, universal life or variable life. The conversion to the Permanent Coverage can be accomplished without underwriting or financial penalty.

Insurance carriers, by offering the convertible term product, provide coverage during the initial period that is both cost competitive and also offers the largest death benefit in relationship to premium paid. Younger policy holders many times seek term insurance to provide a large death benefit with the necessary features such as guaranteed renewability and multiple benefit amounts typically included with term insurance.

The conversion option comes into play as a policy holder’s financial and coverage requirements change with age. A policy holder may want the security of permanent life insurance, which means that coverage will be in force as long as premiums are paid and until the death benefit claim is submitted. The conversion to Permanent Coverage will also result in adding cash value in addition to the death benefit. The cash value of the Permanent Coverage not only creates an investment opportunity, in conjunction with a life insurance benefit, but also a cash asset that can be used to secure a loan or to pay premium. The investment nature of Permanent Coverage contributes to an individual’s long-term investment goals.

When Term Coverage is converted to Permanent Coverage, typically no underwriting review is required. Also, since the same carrier is used for the conversion, the transition from Term Coverage to Permanent Coverage is seamless, which eliminates any possibility of a gap in coverage.

There are disadvantages associated with converting Term Coverage to Permanent Coverage. Once the conversion has been completed, the policy holder can experience increased premiums. The death benefit may be significantly reduced in order to maintain affordable premiums. The terms by which the conversion is completed are very restrictive with respect to when a conversion can be completed, what type of conversion policy will be allowed and what benefits will be offered by the converted coverage.

The conversion feature becomes a very cost competitive option for the individual desiring higher initial coverage benefits with Term Coverage with the opportunity to transition the policy to an investment vehicle with Permanent Coverage, while maintaining a death benefit feature for desired financial protection.

Tim Jarvis is a licensed and experienced Texas life insurance agent who focuses on educating his fellow Texans on the best way to shop and quote Texas life insurance coverage