Convertible Term Insurance Plans are becoming increasingly popular as they offer the option to convert a regular term policy into a whole life insurance or endowment plan without the need for any additional medical underwriting.
This feature enables the policyholder to secure lifetime coverage and also benefits the policyholder's family members to meet financial needs arising from unexpected tragedies of life.
Convertible term insurance plans offer the flexibility to upgrade to whole life coverage to secure insurance needs for a longer period whereas regular term plans offer life cover only for a fixed period. In a pure-term insurance plan, if the policyholder survives till the policy term, then no maturity benefit is available.
However, if the pure term is converted into endowment after the predefined policy term, the policyholder will also get the maturity benefit, even if it is more than the policy term. The premium of a convertible term insurance plan is higher than that of a pure term insurance plan.
Convertible term insurance helps in letting you stay covered as your family responsibilities increase with time.
Additionally, purchasing a new endowment assurance plan later in life will be costly as mortality rates increase with age. In such a situation, a convertible term insurance plan will give a person the benefit of insurance coverage along with savings without paying higher mortality rates.
According to experts, a convertible term plan provides affordable term insurance initially and later it can be converted into a permanent life insurance plan.
This option ensures lifelong protection regardless of future health changes while locking the premium at a lower rate depending on the age at which the term plan is purchased.
Before buying a convertible term plan, people should keep in mind the long-term needs of their family such as children's education, buying a house, or life after retirement.
Since insurance companies will have different terms and conditions for converting term plans, people should carefully review the conversion options for flexibility. They must understand the current and future costs.
You should also ensure whether its premium fits your budget or not. Experts say that it is cheaper to buy convertible term plans online.
The life insurance company may ask for a medical test as a part of the risk assessment before approving the convertible term plan.
However, there will be no new underwriting process at the time of conversion of the plan. Before converting a term plan into an endowment plan, people should keep in mind that the maximum sum assured for the remaining tenure of the policy will be that of the original term plan.
Policyholders can choose to pay premiums on a monthly, quarterly or annual basis.
The premium for a convertible term plan is determined based on the age of the insured at entry, sum assured, policy tenure and underlying health condition.
The premium remains fixed only during the tenure of the term plan. Once the policyholder converts the term plan to permanent, the premium is calculated based on the age attained and the new permanent plan.
Experts say that after conversion to the new permanent plan, the premium increases significantly.
The policyholder will get the benefit of tax deduction under Section 80C of the Income Tax Act on a premium of up to Rs 1,50,000. Under Section 10 (10D), you will get the benefit of tax exemption on the maturity of the plan.