Term life insurance provides affordable coverage, but a critical question often goes unasked: What happens when your term life insurance lapses? If your health has changed or your financial needs have evolved, you could face a significant coverage gap.
This is where two powerful features, renewability and convertibility, become essential. These options provide the flexibility to adapt your coverage to life’s changes, ensuring your long-term financial security.
What is Renewable Term Life Insurance?
A renewable term life insurance gives you the right to extend your coverage after the initial term expires, without having to prove your insurability again. This means no new medical exams or health questionnaires are required.
This can be done by either:
- Renewing your existing term policy with the same insurer, or
- Purchasing a new term policy from the same insurer.
At renewal, you must begin paying higher premiums for your attained age.
For example, if you have a 10-year term policy, you can renew it at the end of the 10 years for another term (often 10 years, or sometimes on a yearly basis). Most policies have a maximum renewal age, typically between 75 and 85, after which coverage terminates. The exact details depend on the insurer.
Pros and Cons of Renewable Term Life Insurance
There are four advantages to purchasing a renewable term life insurance policy:
- Guaranteed Insurability: Renewing a policy does not require proof of insurability, which guarantees that coverage can be extended regardless of changes to your health.
- For example, if you develop a chronic health condition during your initial term, renewing lets you extend protection that may be difficult to qualify for with a new insurer.
- Affordable Premiums: While renewal premiums increase, they remain more affordable than purchasing new coverage after aging or developing health issues.
- Convenience: Renewing your existing coverage is very convenient. You don’t need to re-qualify or shop around for a new policy.
- Coverage Flexibility: You have flexibility over how long to extend coverage. You can renew on a year-by-year basis as needed. This accommodates changing life insurance needs.
There are also four drawbacks to note with renewable term life insurance:
- Expensive Renewal Premiums: Renewal premiums are not based on your original age but on your attained age. An insurer prices this risk knowing that individuals in poorer health are more likely to renew. Expect premiums to be several times higher than your initial rate.
- Missed Qualification Opportunities: By skipping new underwriting, you lose a chance to potentially qualify for lower premiums by demonstrating good health.
- Temporary Solution: Renewability only extends temporary coverage. It does not provide a permanent, lifelong solution and coverage will eventually end
What is Convertible Term Life Insurance?
A convertible term life insurance allows you to exchange your temporary term policy for a permanent life insurance policy without proving your insurability. This conversion privilege is one of the most valuable riders you can have on a term policy.
The conversion must typically be done before a specific deadline, such as the end of the term or before you reach a certain age (e.g., age 70 or 75), as specified in your policy contract.
Your premiums are based on your age at the time of conversion. So, they will be higher than your original term premiums due to age.
Pros and Cons of Convertible Term Life Insurance
There are five potential benefits to choosing a convertible term life insurance policy:
- Lifelong Coverage: Converting provides a permanent solution that will not expire, ensuring your beneficiaries receive a death benefit regardless of when you pass away.
- Guaranteed Insurability: Like renewability, this allows you to secure permanent coverage even if your health deteriorates.
- Cash Value Funding: Permanent policies build a tax-deferred cash value component that you can borrow against or use to supplement retirement income.
- Stable Premiums: Once converted, the premiums for your new permanent policy are typically level and will not increase for the rest of your life, unlike renewable term policies.
- Avoid Insurance Gap: Converting allows you to seamlessly continue coverage without gaps in protection when your term policy expires.
You also keep in mind the following drawbacks if considering a convertible term:
- Significant Premium Increases: Permanent life insurance is more expensive initially than term insurance. Premiums after converting will be higher than your original term policy.
- Less Flexibility: With permanent insurance, you commit to lifelong coverage, which offers less flexibility than short-term renewable term policies.
- Strict Deadlines: If you miss the conversion deadline outlined in your policy, this valuable option is lost forever. A coverage gap may occur until new insurance is purchased.
Overall, the pros of convertible term life insurance tend to outweigh the cons. The lifelong coverage and guaranteed insurability make convertible terms very appealing.
Strategic Considerations for Your Convertible Term Life Policy
Understanding the definitions is just the first step. To truly benefit, you must know how to evaluate and use these features. Here’s what to look for and what to ask.
The Conversion Window: Don’t Miss It
Your right to convert is not indefinite. Every policy has a conversion deadline. It might be the end of the term (e.g., before the end of year 20 on a T20 policy) or a specific age (e.g., before your 71st birthday), whichever comes first. Identify and calendar this date when you buy your policy.
Partial vs. Full Conversion
Many people don’t realize they may not have to convert the entire face value of their term policy. For example, if you have a $1,000,000 term policy but only need $300,000 of permanent coverage for final expenses, many insurers allow you to do a partial conversion. You would convert $300,000 to a permanent policy and could choose to either keep the remaining $700,000 as a term policy or let it lapse.
Look for Conversion Credits
Some insurance companies offer a conversion credit as an incentive. They may refund a portion of your last year’s term premium or apply it as a credit toward the first premium of your new permanent policy. This can be a valuable financial benefit, so ask if this feature is available.
Key Questions to Ask Your Advisor
Don’t just accept a policy. Interrogate the details with your advisor:
- What is the exact age and date deadline for conversion?
- Does this policy allow for partial conversions? If so, what is the minimum conversion amount?
- What specific permanent policies can I convert to (e.g., non-participating whole life, participating whole life, universal life)? Can I see an illustration of what each would cost today if I were my target conversion age?
- Are there any conversion credits available?
- What is the maximum renewal age for the term policy? Do renewal premiums increase annually or every 5/10 years?
Renewable vs. Convertible Life Insurance: When to Consider
The main difference between renewable and convertible life insurance is what happens after the initial term expires. With renewable life insurance, you extend your coverage for another term. With convertible life insurance, you switch your term policy to a permanent one.
Here is a summary table of the most significant differences between term and permanent:
| Feature | Renewable Term | Convertible Term |
|---|---|---|
| Purpose | Extend coverage for another term | Convert to permanent life insurance |
| New Medical Exam Required | No | No |
| Premiums | Increase significantly at each renewal | Increase at conversion but then remain level for life |
| Coverage Duration | Temporary (up to max age) | Permanent, last your entire life |
| Cash Value | No | Yes |
| Flexibility | Can renew multiple times | One-time conversion |
| Best for | Short-term needs that extend beyond the initial term, especially if health has changed. | Long-term needs, like estate planning, or if you desire lifelong coverage but can only afford term now. |
A Real Life Examples
William purchased $750,000 worth of 20-year term life insurance at the age of 35 to protect his family. By age 50, he was diagnosed with heart disease, making it impossible to qualify for new coverage.
With a renewable term policy, William can simply renew his coverage for another 10-20 years up to the maximum renewal age. This guarantees his family will remain protected despite his health deterioration.
Had William purchased regular non-renewable term life insurance, he would have lost his coverage completely after the initial 20-year term and would have been unable to purchase new insurance.
Comparing Options from Major Canadian Insurers
Nearly all major Canadian life insurance providers offer term policies that are both renewable and convertible. However, the quality and flexibility of their conversion options vary. When comparing, focus on the permanent products they offer for conversion.
Sun Life – Best for Universal Life Insurance
Sun Life offers competitive 10, 20 and 30-year renewable term life insurance policies.
For convertible terms, they offer a range of conversion options, including participating whole life and universal life. Their “SunUniversalLife” products are known for their flexibility, making them a strong consideration for those who want to actively manage their policy post-conversion.
Manulife – Well-Rounded Mix of Life Insurance
Manulife sells both renewable term and a wide range of permanent policies:
- Renewable term – Available in 10, 15, 20 and 30-year policy terms.
- Whole life insurance – Manulife’s basic whole life option for conversions.
- Universal life insurance – Manulife’s “Manulife UL” universal policies have competitive premiums and interest rates. Provides a strong convertible universal life insurance choice.
Their diversity allows for a tailored approach depending on your risk tolerance and goals for the permanent policy.
Canada Life – Focus on Whole Life Conversion Products
Canada Life is known for a strong focus on participating whole life insurance, which may appeal to those seeking long-term, stable growth through dividends. Their conversion process is often streamlined for existing term policyholders.
Other Insurers
Most major insurance companies in Canada (RBC Life Insurance, BMO Insurance, Empire Life, etc.) have their proprietary life insurance products for renewals and conversions. The key is to look beyond the term policy itself and analyze the permanent product you would be converting into. Compare illustrations, management fees (for UL), and dividend history (for participating whole life).
The Bottom Line
- The renewable term allows continuing coverage if you need temporary insurance beyond your original term length.
- Convertible term provides the option to upgrade to permanent insurance if you need lifelong protection.
Ultimately, prioritizing renewable and convertible features will provide maximum flexibility to adapt your life insurance coverage as needed, regardless of what life throws your way.
Work with an insurance advisor to select the ideal renewable and convertible term life insurance policy tailored to your coverage needs now and in the future.
FAQs
How do I know if my term life insurance policy is renewable?
Most term life insurance policies sold in Canada today are renewable by default. However, you should check your policy documents or ask your insurance advisor to confirm if renewal provisions are included with your specific term life insurance policy.
When can I renew my term life insurance policy?
You can renew your term life insurance policy once the initial term expires. Renewals are then typically available every 1-5 years up until a maximum renewal age of 75-80, depending on the insurer.
What types of permanent life insurance can I convert my term policy to?
The most common options for converting term life insurance are whole life and universal life insurance. Some insurers offer just one type like whole life, while others provide multiple permanent insurance options. Check with your advisor on what specific permanent policies you can convert to.
How much does it cost to convert term to permanent life insurance?
Converting to permanent insurance will also cost more than your initial term policy. Permanent life premiums are based on your age when the term policy is converted over. Converted policies have higher premiums due to providing lifelong coverage.
What is the process for converting my term policy?
Converting term life insurance into permanent coverage involves completing policy paperwork to exchange your term policy for the new permanent policy. You will select the type of permanent insurance, coverage amount and premiums. No new medical underwriting is required in most cases.
Can I renew my term policy after converting to permanent insurance?
No, once you convert your term life insurance policy to permanent insurance, that new policy will replace your old term policy. Renewals allow extending temporary term coverage, while conversion switches you to lifelong permanent coverage.
Do renewal premiums ever decrease?
No, expect renewal premiums for term life insurance to increase incrementally each time you renew the policy. Unlike new applications, the renewable term does not re-qualify you, so premiums continue rising based on your age. Converting to permanent insurance provides level, fixed premiums.
Article Sources
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