A life insurance conversion option allows you the option but not the obligation to convert all or part of your term life insurance to permanent insurance.
Conversion Option: Life Insurance In Canada Explained
Buy Term Life Today Change to Whole Life Later
The conversion option in a life insurance policy is a feature that allows the policyholder to convert their term life insurance policy into a permanent life insurance policy without having to undergo a medical examination or provide proof of insurability. This conversion can be done at any time during the term of the policy, or up until the policyholder reaches a certain age, as specified in the policy. The conversion option is a valuable feature if you want the flexibility to change your coverage as your needs and circumstances change.
Life insurance in Canada is a complex topic with many different aspects to consider. One of the most important aspects is the type of policy you choose, and within that, the features and options that come with it. The conversion option is one such feature that can have a significant impact on your coverage and your financial planning. In this glossary article, we will delve into the details of the conversion option, how it works, its benefits and drawbacks, and how it fits into the broader context of life insurance in Canada.
Understanding Life Insurance Policies
Before we delve into the specifics of the conversion option, it's important to have a basic understanding of the different types of life insurance policies available in Canada. The two main types are term life insurance and permanent life insurance. Term life insurance provides coverage for a specific period of time, or term, such as 10, 20, or 30 years. If the policyholder dies during this term, the death benefit is paid out to the beneficiaries. If the policyholder survives the term, the policy expires with no payout.
Permanent life insurance, on the other hand, provides coverage for the policyholder's entire lifetime. As long as the premiums are paid, the policy does not expire and the death benefit is paid out whenever the policyholder dies. There are different types of permanent life insurance, including whole life, universal life, and variable life, each with its own features and options.
Term Life Insurance
Term life insurance is the simplest and most affordable type of life insurance. It is designed to provide financial protection for a specific period of time, such as 10 or 20 years. With term life insurance, if the insured dies during the term of the policy, the death benefit is paid out to the beneficiaries. However, if the insured survives the term, the policy expires with no payout. This is why term life insurance is often used for temporary needs, such as covering a mortgage or providing for a child's education.
One of the main advantages of term life insurance is its affordability. Because it only provides coverage for a specific term and does not accumulate cash value, the premiums are generally lower than for permanent life insurance. However, the downside is that if the insured survives the term, the policy expires worthless. This is where the conversion option comes into play.
Permanent Life Insurance
Permanent life insurance provides lifelong coverage and has a cash value component in addition to the death benefit. The cash value is a savings account that grows over time, tax-deferred, and can be accessed by the policyholder during their lifetime. There are different types of permanent life insurance, including whole life, universal life, and variable life, each with its own features and options.
Whole life insurance provides a guaranteed death benefit, guaranteed cash value growth, and fixed premiums. Universal life insurance offers more flexibility with the ability to adjust the premiums and death benefit, and the cash value growth is based on a market interest rate. Variable life insurance allows the policyholder to invest the cash value in a variety of investment options, with the potential for higher returns but also higher risk.
The Conversion Option
The conversion option is a feature that allows the policyholder to convert their term life insurance policy into a permanent life insurance policy without having to undergo a medical examination or provide proof of insurability. This means that even if the policyholder's health has deteriorated since they first took out the term policy, they can still convert to a permanent policy at the same health rating they had when they first took out the term policy.
The conversion option can be exercised at any time during the term of the policy, or up until the policyholder reaches a certain age, as specified in the policy. The age limit varies by policy and insurance company, but it is typically between 65 and 70 years old. Once the policy is converted, the premiums will be higher than the term policy, reflecting the permanent coverage and cash value component of the new policy.
Benefits of the Conversion Option
The main benefit of the conversion option is the ability to switch to permanent coverage without having to undergo a medical examination or provide proof of insurability. This is particularly valuable for policyholders who have developed health issues since they first took out the term policy. Without the conversion option, they might not be able to qualify for a new policy, or they might have to pay significantly higher premiums.
Another benefit of the conversion option is the flexibility it provides. Life circumstances can change over time, and the coverage that was suitable when you first took out the term policy might not be suitable later on. With the conversion option, you can adjust your coverage to meet your changing needs. For example, if you initially took out term life insurance to cover a mortgage, but later want to provide a legacy for your children or grandchildren, you can convert to a permanent policy that will not expire as long as the premiums are paid.
Drawbacks of the Conversion Option
While the conversion option offers many benefits, there are also some drawbacks to consider. One of the main drawbacks is the higher premiums. When you convert from a term policy to a permanent policy, the premiums will increase to reflect the lifelong coverage and cash value component of the new policy. This can make the new policy significantly more expensive than the original term policy.
Another drawback is that the conversion option may not be available on all term policies. Some insurance companies do not offer the conversion option, or they may only offer it on certain policies or for an additional cost. Therefore, if the conversion option is important to you, it's crucial to check the policy details before you purchase.
How to Use the Conversion Option
If you decide to use the conversion option, the first step is to contact your insurance company or agent. They can provide you with the details of the conversion process and the options available to you. You will need to decide what type of permanent policy you want to convert to, and the amount of coverage you want. The new policy will have its own terms and conditions, including the premiums, death benefit, and cash value component, so it's important to review these carefully.
Once you have decided on the new policy, the conversion process is relatively straightforward. You will need to fill out a conversion application, which is usually a simple form that confirms your decision to convert and the details of the new policy. Once the application is processed, your new policy will be issued and your term policy will be terminated. The new policy will have the same policy date as the original term policy, which means that the length of time you have been insured (for purposes such as determining the cash value) will be based on the original policy date.
Timing of the Conversion
The timing of the conversion is an important consideration. The conversion option can be exercised at any time during the term of the policy, or up until the policyholder reaches a certain age, as specified in the policy. However, the sooner you convert, the higher the premiums will be, because the premiums for a permanent policy are based on the policyholder's age at the time of conversion. Therefore, it's a balance between converting early to secure permanent coverage and waiting to keep the premiums lower.
Another factor to consider is your health. If your health has deteriorated since you first took out the term policy, it might be advantageous to convert sooner rather than later. Even though the premiums will be higher, you will be able to secure permanent coverage without having to undergo a medical examination or provide proof of insurability. On the other hand, if your health is still good, you might choose to wait and reassess your needs and circumstances closer to the end of the term.
Choosing the New Policy
When you use the conversion option, you will need to choose the type of permanent policy you want to convert to. This decision should be based on your current needs and circumstances, as well as your future goals and plans. For example, if you want guaranteed coverage and cash value growth, you might choose a whole life policy. If you want more flexibility and the potential for higher returns, you might choose a universal or variable life policy.
It's also important to consider the amount of coverage you need. The new policy can be for the same amount as the original term policy, or it can be for a lesser amount. However, it cannot be for a greater amount. If you need more coverage, you will need to apply for a new policy and provide proof of insurability. Therefore, when you first take out the term policy, it's a good idea to choose an amount of coverage that will be sufficient for your future needs, in case you decide to use the conversion option later on.
Conversion Option and Life Insurance in Canada: Conclusion
The conversion option is a valuable feature that can provide flexibility and security in your life insurance planning. It allows you to switch from a term policy to a permanent policy without having to undergo a medical examination or provide proof of insurability, which can be a significant advantage if your health has deteriorated. However, the conversion option also comes with higher premiums and may not be available on all policies, so it's important to consider these factors and review the policy details carefully.
Life insurance in Canada is a complex topic with many different aspects to consider. The conversion option is just one of many features and options that can impact your coverage and your financial planning. By understanding these aspects and making informed decisions, you can ensure that you have the right coverage for your needs and circumstances, both now and in the future.
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Here are answers to frequently asked questions...
No, the only thing you will ever pay is a premium to the insurance company that provides the life insurance policy for you. We provide you quotes and advice on best options for your situation.
Yes, we have access to various discounts based on your health and the amount of life insurance you purchase. For example if you've never smoked in your life and are buying more than $1 million in life insurance
Rates are based on your age, health history, smoking status, gender and income. The insurance company also compares and makes assessments based on similar individuals with the same profile like age, gender, smoker status. Unlike workplace or association rates which are cheaper and based on you working at a particular company, being associate with an affinity group or the claims of the whole group i.e. your rate is affected by someone who smokes even if you don't smoke, or if you never claim and other claim multiple times, for example.
We simplify the process knowing how busy life gets. The first step is simply to request your quotes and getting a sense of the cost and coverage available. Next, we compare the policy options and other riders like guaranteed insurability and discuss what makes sense for you and answer your questions. Lastly, you apply and buy risk-free.
We are an independent life insurance broker, meaning that we do not have an affiliation with any one Canadian life insurance company. We are looking out for your best interests as we don’t have to meet any requirements to do business with any specific company. We actually get a finders fee from these insurance companies and they are all the same, so we don’t have any financial conflict of interest either.
In most cases, it can take between 2 weeks and 1 month from beginning to end. A lot of the time may depend on follow up information required by the insurance company. In our experience 1 month is usually a standard timeframe. Sometimes, depending on the amount you apply for and your age, for example children's life insurance or no medical, the approval is instant.
Underwriting is where the insurance company verifies your information that you submitted on the application your complete with us and gathers additional details such as health history, travel, and personal history to determine the best rate possible.
Any type of life insurance is great especially if you suddenly pass unexpectedly. However, just like getting a company car allowance, you only have it for as long as you work for that company because it's a benefit or "perk" of working there. When you leave you lose that perk. You are also limited to 2 or 3 times your salary which may not be enough. More importantly, how many times have you changed or will potentially change jobs?
When you buy your own personal private insurance you don't worry about losing it if you change jobs or your health changes.
As the name suggests, the AD & D policy will only pay if your death is caused by an accidental death or dismemberment of a body part. Personal private life insurance will pay regardless of the cause with the only exception being cases such as suicide.