Description

Convertible Term Assurance is a term assurance policy with the option to convert before expiry into a qualifying whole life or endowment or, with some policies, a level term or a further convertible term assurance policy.

Examples of Use

• A young person with the need for life cover and who has limited resources and unknown future requirements or commitments.
• Protection for a potential renewable loan facility and also business protection (sometimes what is known as keyperson insurance).
• Someone who requires cover at low cost, with guaranteed insurability to convert to a longer-term contract if required.

Advantages

• The policyholder cannot be refused the right to take out a new policy or charged a higher premium at conversion for health reasons.
• It provides protection for those persons who will lose financially by the death of the life assured.
• It is a cheap form of life insurance until the conversion is effected.
• The policy offers flexibility and it can be converted at any stage within the original policy term without further charge or medical evidence.
• It can convert to endowment if the client requires a savings vehicle or it can convert to a whole or life for a longer term protection contract.

Disadvantages

• The policy has no value on surrender or at the end of the policy term, unless converted to a policy with an investment element 
• Medical evidence is required at the outset and the cost of cover may be expensive or unavailable for those in poor health.
• It does not pay out on illness of the life assured.
• The company used should also be competitive for endowment/whole of life cover.
• Although the conversion right is available regardless of health, other factors e.g. occupation change can affect the premium rate.

Points of Interest

• Used by those who require cover at low cost initially and may want to convert to a longer term contract.
• Usually set up under Trust or on what is known as a “life of another” basis. This ensures that for most individuals the benefits are in the right hands at the right time.
• Arrangements that include critical illness can be considered. This will pay out the sum assured if the life assured has a terminal illness with a predetermined number of months to live.
• If written on a “life of another” basis there would be ownership implications on conversion. 
• If the conversion option is not exercised before end of term, the policy will simply cease and the right to convert is lost.