Convertible term insurance plans are increasingly becoming popular as these offer the option to convert a regular term policy into a whole life insurance or an endowment plan without requiring any additional medical underwriting. This feature enables a policyholder to secure lifelong coverage and is especially benefits for those with dependents to meet the financial needs arising from unexpected tragedies of life.
While regular term plans only offer life cover for a specified period, a convertible term insurance plan provides the flexibility to upgrade to lifelong coverage securing insurance needs for the long term. In a pure term insurance plan there is no maturity benefit if the policyholder survives the policy term. However, if the pure term is converted into an endowment after a predefined policy period, the policyholder will get maturity benefit as well even if she outlives the policy period. However, the premium for convertible term insurance plans is higher than that of pure term insurance plans.
A convertible term insurance is helpful to stay protected with insurance as family responsibilities rise. Moreover, buying a new endowment assurance plan later in life will be expensive as the mortality charges increase with age. So, a convertible term insurance plan will give an individual the benefit of savings as well as insurance cover without paying higher mortality charges.
Rakesh Goyal, director, Probus Insurance Broker, says a convertible term plan offers an initial affordable term insurance that can be transformed into a permanent life insurance plan later on, maintaining the same coverage and death benefit. “This option ensures lifelong protection, regardless of future health changes, while locking premiums at a lower rate based on the age at which the term plan was purchased.”
What to keep in mind
Before purchasing a convertible term plan, individuals must align the plan with their family’s long-term requirements such as children’s education, buying a house or retirement. As insurers will have separate regulations and conditions to convert a term plan, individuals must review the conversion options meticulously for flexibility and understand the current and future costs and premiums to ensure that they fit into the budget. Also, it is cheaper to buy a convertible term plan online.
The life insurance company may ask for a medical test as a part of risk assessment before approving a convertible term plan. However, there will be no new underwriting process at the time of conversion of the plan. Before converting a term plan to an endowment plan, an individual must keep in mind that the maximum sum insured will be that of the original term plan for the remaining tenure of the policy. A policyholder can opt to pay the premium amount monthly, quarterly or annually.
Higher premium amount
The premiums for convertible term plans are determined based on the insured’s age at entry, sum assured amount, policy term and the underlying health status. The premiums remain constant only throughout the policy term of the term plan. Once the policyholder converts the term plan into a permanent one, the premiums are recalculated based on the attained age and the new permanent plan. “The premiums increase substantially after conversion to the new permanent plan,” says Goyal.
A policyholder will get tax deduction under Section 80C of the Income Tax Act for premium up to Rs1,50,000. The maturity benefits are also tax-exempt under Section 10(10D) of the Act.