06/14/23
ProTip: Never accept a term policy that is not renewable and convertible unless you have no other option.
Renewable and Convertible are two options available on most (but not all) term life insurance policiesterm life insurance policies in Canada. These two options are always found together, and are provided for in the policy contract at no additional cost. That means that even some of the least expensive term life insurance policies in Canada are renewable and convertible.
Renewable and Convertible term life insurance effectively guarantees your insurability in the future should you decide to purchase life insurance. It allows you to exchange your term life insurance policy for a permanent policy, with no medical exam. This is extremely important and valuable if you become uninsurable.
These options are generally used at the end of the term – 10,20 or 30 years from now. Thus their significance doesn’t become important until many years from now. When you first purchase your term policy, you’ll be concerned about term and premiums. Your assumption should be that at the end of the term you no longer need life insurance and therefore expect to cancel the coverage. And, you’ll have just qualified via the medical requirements.
However by the end of the term, you’ll fall into one of three groups:
It’s the second and third group for which renewable and convertible term become vital. We don’t know which of those three groups you’ll fall into until decades in the future, so it’s important that you plan for these eventualities when you purchase your initial term policy.
Definition: Renewable term life insurance has an initial level term period (the term, generally 10, 20 or 30 years). After the initial term (‘the renewal’) the coverage remains in force but the premiums increase. The policy then ‘renews’ or stays in force until the renewable expiry age, often age 70 to 75.
By contrast, a policy that is not renewable simply expires without warning at the end of the initial term.
How it used to be used: Decades ago, the premiums at renewal on your term policy were the same premiums as someone who’d just taken a medical exam and qualified – so the same premiums as if you’d purchased a new policy at renewal. That meant that consumers would purchase a 5 year term policy and simply renew the policy – the premiums at that point were the same as purchasing a new policy so it was easier to simply keep your original policy and simply renew it.
In the mid 1990’s, life insurance companies changed their pricing so that at renewal the premiums were substantially more expensive than a new policy. This means that you should not expect to keep your policy past into the renewal, or at least not for very long.
How it’s used today: You should purchase a term policy with a term that’s as long as you expect to need the coverage for. At the end of the term you may not be notified, and the policy will simply go into renewal. This means that your coverage remains in force, but the premiums increase. Consumers see a large unexpected increase in premiums and start to investigate. At this point the renewal’s purpose is to give you time to determine which of the three groups above you fall into, and determine how you’d like to proceed. Renewable term policies thus give you some breathing space, with your life insurance coverage still in place, to determine what your options are. A policy that is not renewable simply expires, with no further options. If you’re uninsurable (group #3 above), you’re simply dumped with no further ability to get life insurance.
Generally speaking we don’t care much about the structure or premiums when the policy renews, it’s just there for some breathing space until we can determine what we actually want to do.
Definition: Convertible term life insurance has a policy provision that allows you to exchange your term life insurance coverage for a permanent life insurance policy – without any medical requirements. Premiums for the new permanent policy are based on your current age at that time, for a ‘regular’ health class (unless your initial policy was rated). That means that your new premiums do not reflect any health concerns. Had a heart attack or cancer? You still receive regular premiums.
In group 2 above, you’ve reached the end of your term and have decided that you’d like a smaller amount of permanent insurance. You could qualify medically and purchase a new permanent life insurance policy at that time, or simply convert your existing term policy to permanent which requires simply a signature – no medical.
In group 3 above, people that are older and have become uninsurable often want as much life insurance as they can afford. A non-renewable/non-convertible term policy simply leaves them without life insurance, and no ability to get any more. A convertible term policy allows them to get as much permanent life insurance as they want, at standard/healthy premiums (up to the maximum coverage of their term policy). You can imagine that this convertible option, at that point, is seen as a screaming deal – I can get life insurance for the rest of my life, at healthy premiums, with no medical exam? Yes – that’s what the convertible option lets you do.
Example 1: You purchase $1,000,000 of 20 year term at age 40 that is renewable and convertible. When you turn 60, you notice that your monthly premiums withdrawn from your bank account have just increased substantially. You contact your broker, realize that your term life insurance policy is now in renewal. You decide that you’d like $100,000 of permanent life insurance to cover final expenses and leave a small amount for your beneficiaries. You simply sign a form to convert your term to permanent, and now have a $100,000 permanent life policy, at healthy premiums, with almost no paperwork. It’s the easiest way to get permanent life insurance in the future.
Example 2: You purchase a $1,000,000 of 20 year term at age 40. At age 55 you have a heart attack. You realize that your term life insurance level premiums are only for another 5 years, but now really want a lifetime policy for as much as you can afford. You convert $250,000 to permanent life insurance, with simply a signature and receive that amount of lifetime coverage at healthy premiums, with no consideration for having had a heart attack.
Tip: Renewable and convertible term options are normally taken advantage of in the final years of your term. Therefore when comparing policies, you should ensure that the convertible option expires past the end of your term date, not before. e.g. if you’re 50 and purchasing a term 20, make sure that your convertible expiry date is past age 70. If the convertible expiry date is age 65, then the last 5 years of your policy won’t have the conversion option – and those last 5 years is when you’ll have an increased risk of needing the conversion option.
In recent years, some life insurance companies have started to offer a Partial Conversion with Term Reset choice. I suggest that you also read this article as well, as this feature is an extension of renewable and convertible term life insurance.