Term life renewability and convertibility features

Two options built into many term policies

A term policy covers you for a set period, and when that period ends the coverage simply stops. Two contract features soften that ending. Renewability lets you keep the same term coverage going for another period. Convertibility lets you swap the term coverage for permanent coverage. What makes both valuable is the same thing: you exercise them without providing evidence of insurability. No medical exam, no health questions.

Renewable term

A renewable term policy gives the policyowner the right to renew the coverage at the end of each term for another term, without proving good health. The policy itself sets how long each renewal term lasts. A ten-year policy that renews for successive ten-year terms can be renewed for another ten years, and so on.

• The premium rises at each renewal. The new premium is based on the insured's attained age at renewal, not the original issue age. The premium stays level within each term and then steps up. That is why level-premium term is described as "locked in for the specified period", with term rates that rise as you grow older.
• Annual (yearly) renewable term is the extreme case: the term is one year, so the premium rises every year.
• There is usually an age limit. Insurers typically stop renewals at a stated age, such as 70 or 80, because the cost of coverage at very old ages becomes prohibitive.

Why it costs extra: adverse selection. At renewal time, healthy people often drop the policy and shop for cheaper new coverage, while people whose health has declined keep renewing because they could not qualify elsewhere. The insurer prices that risk into renewable policies, so a renewable term policy costs a little more than an otherwise identical non-renewable one.

Convertible term

A convertible term policy gives the policyowner the right to exchange the term policy for a permanent policy, such as whole life, without evidence of insurability. The conversion privilege usually has to be used within a stated conversion period, for example before a certain age or within the first several policy years. The new permanent policy can be for an amount up to the term face amount; a partial conversion is often allowed.

The premium for the new policy is set one of two ways:

1. Attained-age conversion (the most common). The permanent premium is based on the insured's age at the date of conversion. No back payment is due, but the premium is higher because the insured is older.
2. Original-age conversion (retroactive). The permanent policy is treated as if it had been issued at the original age, so the ongoing premium is lower. In exchange, the policyowner must pay a lump sum, generally the difference between the premiums (or cash values) the permanent policy would have had and what was actually paid for the term coverage, often with interest.

Conversion protects someone whose health has deteriorated: they can lock in lifelong coverage that they could no longer buy on the open market.

Keep them straight

Renew = same term coverage, another period, higher attained-age premium. Convert = term becomes permanent, no evidence of insurability, within the conversion period.

Many policies are both renewable and convertible. Neither feature gives the policy a cash value; term coverage that is not renewed or converted, or whose premium goes unpaid, simply lapses with nothing paid back.