3.3 Option To Renew and Option To Convert
Most term policies contain the option to renew and/or the option to convert.
Option To Renew
Guaranteed renewability allows the policyowner to renew the policy without the insured having to go through medical underwriting (providing evidence of insurability). Of course, the risk to the insurer is higher as the insured ages, so the extra cost is already forecast and built into the premium payments. A 70-year old would most likely have a difficult time securing a new life insurance policy due to declining health and increasing age but cannot be turned down from renewing the existing term policy. This option is most popular on policies that are renewable on a yearly basis (annual renewal term [ART] or yearly renewal term [YRT]).
Option To Convert
The option to convert allows the policyowner the choice of exchanging a term policy for a whole life (permanent) policy at renewal time, yet again without evidence of insurability. Term insurance is akin to "renting" as opposed to permanent insurance, which is more like "buying" a home. Renting a home is typically less expensive than purchasing, in the beginning that is. After time, renting becomes more expensive than level mortgage payments due to constant rental increases.
Jim and Faye rented an apartment when they were newlyweds, five years ago. When they got married, they purchased a five-year term life insurance policy on Jim because it was cheaper than whole life and, being newlyweds, they were on a limited budget. Now they have a two-year-old child and assets that need protection. If they let the term policy lapse, they will have no coverage at all. The option to renew would put them back in the same situation, not enough insurance coverage in the long run. That's where the option to convert is beneficial. They transfer (convert) the term policy into a whole life policy, and begin to build cash value. Now that they are more established and financially stable, they can purchase that house they want and know that the mortgage is secure if Jim (the breadwinner) dies. And the cash value can accumulate enough to help them if needed when they send their child to college. Now Jim and Faye have peace of mind and a sense of security which is, after all, the underlying purpose of buying life insurance.
