The Clowe Agency Blog
What Is A "Convertibility Clause"?
A convertibility clause, also known as a conversion clause, is a provision found in some life insurance policies, particularly in term life insurance policies. This clause gives the policyholder the option to convert their term life insurance policy into a permanent life insurance policy without the need for a medical examination or providing evidence of insurability. Here's a more detailed explanation of how the convertibility clause works:
1. Term Life Insurance vs. Permanent Life Insurance: It's important to understand the difference between term life insurance and permanent life insurance. Term life insurance provides coverage for a specified term (e.g., 10, 20, or 30 years), and it pays out a death benefit to the beneficiary if the insured person passes away during that term. Permanent life insurance, on the other hand, provides coverage for the entire lifetime of the insured person and includes a cash value component in addition to the death benefit.
2. Conversion Option: The convertibility clause gives the policyholder the right to convert their term life insurance policy into a permanent life insurance policy, such as whole life or universal life insurance, during a specific period of time during the term. This conversion option is typically available without requiring the policyholder to undergo a medical exam or prove their insurability, even if their health has deteriorated since they initially purchased the term policy.
3. Conversion Period: The convertibility clause specifies a limited period during which the policyholder can exercise this conversion option. This period is usually stated in the insurance policy and typically ends before the term life insurance policy expires. For example, a policy might allow conversion within the first 10 or 15 years of the term policy.
4. Permanent Policy Choices: When exercising the conversion option, the policyholder can choose from the available permanent life insurance policies offered by the insurance company. The specific options and terms may vary depending on the insurance company and policy. That is why it is important to consult with a state-licensed life insurance broker like The Clowe Agency.
5. Premium Adjustment: When converting to a permanent policy, the premium (the amount paid for the insurance coverage) will typically increase compared to what the policyholder was paying for the term policy. This is because permanent life insurance policies are generally more expensive due to their lifetime coverage and cash value component.
6. Primary Benefit of Conversion: The primary benefit of the convertibility clause is that it allows policyholders to maintain life insurance coverage beyond the initial term, even if their health has declined. This can be especially valuable if the insured person has developed health conditions that would make it difficult or expensive to obtain a new life insurance policy.
It's important for policyholders to carefully review the terms and conditions of the convertibility clause in their life insurance policies. This is where The Clowe Agency can assist. While this option provides flexibility and ensures continued coverage, there may be limitations, such as the types of permanent policies available for conversion and any associated premium increases. Additionally, the specific terms of convertibility clauses can vary between insurance companies and policy contracts, so it's essential to understand the details of your own policy. That is why finding a broker who is knowledgeable about many different types of life insurance policies. At The Clowe Agency, all of our brokers are state-licensed and up to date on all new regulations, laws, and new policies offerings. Making sure we educate our clients is our number one priority.
The Clowe Agency
6700 Cantata St. NW Suite 205, Albuquerque NM, 87114
(505) 306-3811
