Renewable Convertible Term Life Insurance: Pros And Cons

 

Term life insurance is a simple and affordable way to get life insurance coverage for a specific period of time, usually between 10 and 30 years. You pay regular premiums during the term, and if you die within that time frame, your beneficiaries receive a lump sum payout called the death benefit. If you outlive the term, however, there’s no payout and your coverage ends.

But what if you want to keep your coverage after the term expires, or change it to a different type of policy? That’s where renewable convertible term life insurance comes in. This type of policy not only provides a death benefit to your beneficiaries if you pass away during the term, but also allows you to extend or change your policy without having to re-qualify for new coverage.

Renewable convertible term life insurance can offer the best of both worlds: flexibility and security. But it also has some drawbacks, such as higher cost and limited availability. In this article, we’ll explain what renewable convertible term life insurance is, how it works, and how it can benefit you. We’ll also compare its pros and cons with other types of life insurance and help you decide if it’s right for you.

How Renewable Convertible Term Life Insurance Works

Renewable convertible term life insurance is a variation of term life insurance that adds two features to the policy: renewability and convertibility.

Renewability means that you can renew your policy for additional terms without having to prove your insurability again. For example, if you buy a 10-year renewable term life insurance policy, you can renew it for another 10 years at the end of the term, regardless of your health status. However, you’ll have to pay a higher premium based on your age at renewal.

Convertibility means that you can convert your policy to a permanent or cash value policy without having to prove your insurability again. For example, if you buy a 10-year convertible term life insurance policy, you can convert it to a whole life or universal life policy at any point during the term or before your 70th birthday (whichever comes first), regardless of your health status. However, you’ll have to pay a higher premium based on the type and amount of coverage you choose.

According to IRMI, renewable convertible term life insurance is usually issued for a period of 1 or 5 years that can be renewed for additional terms or converted to a permanent or cash value policy. The policy can be renewed or converted until the expiration date or the 70th birthday of the policyholder, whichever comes first.

The cost of renewable convertible term life insurance depends on several factors, such as your age, health, term length, coverage amount, and insurer. According to Investopedia, renewable convertible term life insurance is more expensive than regular term life insurance for the same amount of coverage because it offers more flexibility and security.

Benefits Of Renewable Convertible Term Life Insurance

Despite its higher cost, renewable convertible term life insurance has some advantages that may appeal to some people. Here are some of them:

• Being able to renew the policy for additional terms without proof of insurability. This is one of the main benefits of renewable convertible term life insurance. If your health deteriorates during the term of your policy, you don’t have to worry about losing your coverage or paying exorbitant premiums. You can simply renew your policy for another term at a predetermined rate based on your age.
• Being able to convert the policy to a permanent or cash value policy without proof of insurability. This is another benefit of renewable convertible term life insurance. If you want to extend your coverage beyond the term or access the cash value of your policy, you don’t have to go through another round of medical screening or underwriting. You can simply convert your policy to a permanent or cash value policy that suits your needs and goals.
• Having peace of mind that your coverage will not expire or become unaffordable. Renewable convertible term life insurance can give you peace of mind that you’ll always have options to keep or change your coverage without risking being denied or overcharged. You can protect your loved ones from financial hardship in case you die unexpectedly or need long-term care in the future.
• Having the option to adjust your coverage to suit your changing needs and goals. Renewable convertible term life insurance can also give you the option to adjust your coverage to suit your changing needs and goals. For example, if you pay off your mortgage or your kids finish college, you may not need as much coverage as before. You can reduce your coverage amount or convert it to a permanent or cash value policy that offers more benefits. Alternatively, if you need more coverage or want to leave a legacy for your heirs, you can increase your coverage amount or convert it to a permanent or cash value policy that offers more benefits.

Drawbacks Of Renewable Convertible Term Life Insurance

Renewable convertible term life insurance is not a perfect solution, however. It also has some drawbacks that may outweigh its benefits for some people. Here are some of them:

• Paying more than regular term life insurance for the same amount of coverage. This is the biggest downside of renewable convertible term life insurance. You have to pay a lot more for the same amount of coverage as regular term life insurance, and that extra money could be better used elsewhere. For example, according to The Motley Fool, a 35-year-old male in good health could pay $20 per month for a 20-year, $500,000 regular term life insurance policy, or $30 per month for a 20-year, $500,000 renewable convertible term life insurance policy. That’s a difference of $10 per month, or $2,400 over 20 years.
• Paying even more if you renew or convert the policy at older ages. Another drawback of renewable convertible term life insurance is that you’ll pay even more if you renew or convert the policy at older ages. The premiums for renewable term life insurance increase with each renewal based on your age, and the premiums for permanent or cash value policies are higher than those for term policies based on the type and amount of coverage. This means you could end up paying a lot more than you expected or budgeted for.
• Missing out on potential returns from investing the extra money elsewhere. Another drawback of renewable convertible term life insurance is that you’re giving up the opportunity to invest the extra money you’re paying in premiums and earn a higher return than the cost of insurance. For example, according to Forbes, if you invested the difference between a regular term life insurance policy and a renewable convertible term life insurance policy in a diversified portfolio that earned an average annual return of 7%, you could end up with more money than the cost of insurance after 20 years.
• Having limited choices of insurers and terms. As mentioned earlier, renewable convertible term life insurance is not widely offered by many insurers, and those that do offer it may have different terms and conditions for it. This means you have fewer options to compare and shop for renewable convertible term life insurance policies than for regular term life insurance policies. You may also have trouble finding a renewable convertible term life insurance policy that matches your desired term length or coverage amount.

Alternatives To Renewable Convertible Term Life Insurance

If you’re not convinced that renewable convertible term life insurance is right for you, don’t worry. There are other options that can provide similar or better benefits than renewable convertible term life insurance. Here are some of them:

• Buying regular term life insurance and investing the difference in cost. This is probably the best alternative to renewable convertible term life insurance for most people. You can buy a regular term life insurance policy that meets your coverage needs and budget, and then invest the difference between what you would pay for a renewable convertible term life insurance policy in a savings or investment account. This way, you can get both protection and growth for your money, and potentially end up with more money than the cost of insurance.
• Buying a permanent life insurance policy that builds cash value. If you want a life insurance policy that lasts your whole life and gives you access to cash value, you can consider buying a permanent life insurance policy (such as whole or universal). These policies are more expensive than term life insurance policies, but they have some advantages over renewable convertible term life insurance policies, such as:
  • The cash value grows tax-deferred and can be used for any purpose
  • The cash value can be borrowed against or withdrawn without affecting the death benefit
  • The cash value can be used to pay premiums or increase the death benefit
  • The death benefit is guaranteed as long as premiums are paid
• Buying a hybrid policy that combines life insurance and long-term care insurance. If you’re concerned about paying for long-term care expenses in the future, you can consider buying a hybrid policy that combines life insurance and long-term care insurance. These policies are also more expensive than term life insurance policies, but they have some advantages over renewable convertible term life insurance policies, such as:
• The death benefit can be used to pay for long-term care costs if needed
• The death benefit is reduced by the amount of long-term care benefits paid out
• The premiums are guaranteed and will never increase
• The premiums can be refunded if the policy is canceled

Conclusion

Renewable convertible term life insurance is a type of policy that allows you to extend or change your coverage without re-qualifying. It can offer flexibility and security, but it also has some drawbacks, such as higher cost, limited availability, and opportunity cost.

Before you buy renewable convertible term life insurance, you should weigh its pros and cons and compare it with other types of life insurance. You should also shop around for quotes from different insurers and consult a financial advisor if needed.

Life insurance is a personal decision that depends on your needs, goals, and budget. Renewable convertible term life insurance may be a good option for some people, but not for others. The important thing is to find a policy that gives you peace of mind and protects your loved ones.