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Convertible Term Life Insurance
While term insurance is the simplest form of life insurance protection and can provide you the largest death benefit payout for a given amount of money, its biggest downside is that it doesn’t build a cash value over time.
Due to the above reason, many people prefer other endowment plans that can provide financial protection, at the same time, building up cash value. However, these plans come at a higher premium for a given sum assured, as compared to the term plans.
What if we tell you that you can combine the best of both the worlds?
The answer is - ‘convertible term insurance’, a dynamic solution that offers both short-term security and long-term adaptability.
What is a Convertible Term Insurance?
A Convertible Term Plan is a variant of term plan that combines the simplicity and affordability of term insurance with a valuable feature - convertibility. It allows policyholders to convert their term policy into another endowment insurance policy.
This feature offers individuals the flexibility to adapt their coverage as their life circumstances change without the hassle of reapplying for a new policy.
However, the terms and conditions, especially with respect to the policy year when conversion can be opted, might differ across insurance providers.
How Does a Convertible Term Insurance Work?
Now that we know what a convertible term insurance is, let’s see how it works taking a scenario:
Mr. Sharma, aged 35 years, buys a convertible term insurance plan for a term of 20 years and a sum assured of 25 lakhs.
His policy allows a conversion to an endowment assurance plan only in the last 5 years of the policy tenure. In the case of conversion, his policy would pay a maturity benefit equal to the sum assured.
Below are the following cases that can happen in the case of Mr. Sharma:
Case 1: In the 12th year of the policy, Mr. Sharma meets an unfortunate death. The sum assured of Rs. 25 lakhs would be paid to his nominee and the policy would terminate.
Case 2: In the 15th year of the policy, Mr. Sharma decides to convert his policy and then survives the policy period of 20 years. On maturity, a maturity benefit of Rs. 25 lakhs would be paid to him.
Case 3: After the conversion, Mr Sharma meets an unfortunate death in the 18th year of the policy. In this case, the death benefit of Rs.25 lakh would be paid to his nominee and the policy would terminate.
Case 4: In case, he survives the policy term and has not used the option of conversion, no maturity benefit would be paid to him.
What are the Features and Benefits of Convertible Term Insurance?
Here are some of the most common features and benefits of a convertible term plan:
1. Conversion
Convertibility is the standout feature of a Convertible Term Insurance. Policyholders can transition to endowment insurance during the term of the plan, provided their request for conversion is aligned with the insurance provider’s terms and conditions.
2. On Demand Conversion
The option of convertibility can be exercised only by an official request to the insurance provider. If there is no request, the policy will continue as the initially bought term plan.
3. Premium
The premium for term insurance with conversion option is typically more than the regular term plans because it provides the option of maturity benefit if conversion option is taken. However, the premium is still less than the regular endowment plans.
This premium is determined at the inception of the plan and remains the same throughout the tenure of the policy even if it is converted.
4. Benefits Payable
Initially, when the plan is a pure term plan, only the death benefits are payable to the policyholder. However, if the conversion option is exercised and the plan is converted to an endowment plan, it acquires a maturity benefit too along with the death benefit.
5. Underwriting
Risk assessment of the insured, known as underwriting in insurance, is done at the purchase time of the policy. However, when the policy is converted, no fresh underwriting is required.
6. Tax Benefits
Convertible term insurance offers tax benefits under Section 80C of the Income Tax Act for the premiums paid up to a specified limit. The maturity amount, the survival benefits and the death benefit received, including bonuses, is tax-exempt under Section 10(10D) as per the prevailing tax laws.
7. Riders
Convertible Term Plans provide the option of adding riders by paying a nominal additional premium. Some common riders that can be added to these plans are accidental death or disability benefit rider, critical illness rider, terminal illness rider, etc.
What are the Other Types of Term Insurance Plans?
1. Level Term Plans
Level term plans offer a fixed death benefit and premiums throughout the policy term, providing consistent coverage and predictable costs for policyholders.2. Return of Premium Term Plans
These plans provide a death benefit, and if the policyholder survives the term, they receive a refund of the premiums paid, offering a savings component.3. Renewable Term Plans
Renewable term plans allow policyholders to renew their coverage at the end of each term without the need for a medical exam, but premiums typically increase with each renewal.Is Two-in-One Benefit of Convertible Term Insurance Worth it?
So, you might be wondering if this convertible term plan is worth buying, that too with a higher premium than regular term plans.
Before answering that, let's see what are the questions that come to our mind while buying an insurance plan:
- Would this plan be sufficient, and the coverage would replace my income in case of my death?
- What if I survive, Will I get a maturity benefit?
- How about investing in a regular endowment assurance plan that will give me a corpus on maturity?
- But then with my premium budget, the sum assured would go down! Right?
A convertible term insurance is your answer to all these questions. It combines the good things of both the plans.
While the term plan provides you optimal financial protection, the endowment assurance plan, on conversion, provides the maturity benefit to add to your savings corpus.
You can have a sufficient financial coverage for a major part of your policy term and then later convert it into an endowment plan to get a maturity benefit. That way you get a high sum assured during the initial period, a lower premium as compared to regular endowment plans and a maturity benefit too.
The best of both worlds you see.
FAQs about Convertible Term Insurance
How is Convertible Term Insurance Different from Renewable Term Insurance?
Do I Need to Provide Proof of Insurability when Converting?
When can I Convert my Term Insurance Policy?
Other Important Articles Related to Term Insurance
Disclaimer
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.