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Term life insurance plans come in many different variants. There are increasing term plans, decreasing term plans, return of premium plans, monthly income plans. One such term plan variant is a convertible term insurance plan.
A convertible term life insurance plan is also great. It is a term insurance plan which can be converted into another form of life insurance plan providing dual benefits. Want to know more about the plan? Let’s find out:
A convertible term life insurance plan has an option attached to the plan which allows the conversion of the plan to an endowment assurance plan. Some convertible term life plans have an inbuilt conversion option while some allow conversion as an add-on feature. The policyholder can choose to attach this feature by paying an additional premium.
Whether a convertible term life insurance plan has an inbuilt coverage feature or an add-on option, conversion is triggered only when the policyholder makes a formal request to the insurance company. The company does not exercise the conversion option automatically. If the policyholder fails to make a request for conversion, the plan continues as a term life insurance plan and terminates either earlier on the death or on the maturity of the plan.
Premiums are computed based on the age, sum assured, policy term and premium paying term of the plan. Premiums are determined at the plan inception and do not change afterwards. When the policyholder exercises the conversion option the plan and the benefit structure change while the premiums remain unaffected.
When the convertible plan is a term life insurance plan, usually, only a death benefit is payable. When the plan is converted to an endowment assurance plan, the plan acquires a maturity benefit too along with a death benefit.
Underwriting means the assessment of risk done by the insurance company on the life insured. When the plan is issued, it is issued only after underwriting by the insurance company. However, when the plan is converted, no fresh underwriting is required.
Convertible term life insurance plans usually have a limited sum assured available. Since the plan is later convertible to an endowment plan with a maturity benefit, unlimited sum assured levels are not allowed.
The plan allows optional riders which can be taken by the policyholder voluntarily by paying an additional premium. Some common riders available under convertible term life insurance plans are Accidental Death and Disability Benefit Rider, Critical or Terminal Illness Rider, Waiver of Premium Rider, etc.
Convertible term life insurance plans have tax benefits. The premiums paid for the plan are exempted from the purview of income tax under Section 80C while the benefits received, whether death benefit or maturity benefit, are tax exempted under Section 10(10D). Though there is an upper limit of Rs.1.5 lakhs under Section 80C exemption, there are no maximum limits of exemption under Section 10(10D).
A convertible term life insurance plan is sold as a term plan but with an added feature of conversion. Here is a simple example to show how a convertible term life insurance plan works:
Example – Mr. Verma, aged 40 years, buys a convertible term life insurance plan for a term of 20 years. The Sum Assured he chooses is Rs.10 lakhs and the plan allows conversion in the last 5 years of the policy tenure. On conversion, the plan would be changed to an endowment assurance plan with a maturity benefit which is equal to the Sum Assured.
If Mr. Verma dies during the plan tenure, the Sum Assured would be paid. If he wants, Mr. Verma can convert his term life insurance plan to an endowment assurance plan after the 15th policy year. If he does so and survives the plan tenure, Rs.10 lakhs would be paid as maturity benefit when the tenure of 20 years expires and the plan matures. However, if Mr. Verma does not exercise the conversion option, the plan would continue as a term insurance plan and pay no benefit on maturity.
You might be wondering if a convertible term life insurance plan is useful or not. Well, it is. When it comes to buying life insurance, most of you might get confused as to which plan to buy. Should you choose a term life insurance plan which would replace your income in case of your premature death? But what about a maturity benefit? Should you invest in an endowment assurance plan which would create a savings corpus? But, what about optimal coverage?
A convertible term life insurance plan combines the benefits of these two important life insurance plans – term insurance and endowment assurance. While a term life insurance plan promises an optimal life insurance coverage protection, an endowment assurance plan promises savings and a maturity benefit. Thus, you get a dual benefit from a convertible term life insurance plan. Moreover, the premiums are also cheaper since it is a term life insurance plan.
Convertible term life insurance plans are suitable if you want a good maturity benefit out of your term insurance plan rather than the return of premiums paid. You can run the plan as a term plan and as maturity approaches and you are alive, you can convert the plan to ensure that you receive a benefit on maturity.
Though a convertible term life insurance plan is a simple plan which is easy to understand, there are some points which you should remember before buying these plans. These points are as follows:
As stated earlier, convertible term life insurance plans are not very commonly available. Currently, one term insurance plan has the conversion option which is Kotak Term Plan.
Kotak Term Plan is a normal term insurance plan which allows an option for converting the plan to any available plan of the company. The conversion can be done anytime except in the last 5 years of the policy. The allowed Sum Assured cover starts from Rs.3 lakhs and goes up to Rs.25 lakhs. Additional riders are also available under the plan to increase the scope of protection.
If you are thinking of buying a convertible term life insurance plan, study up on the plan features, the conversion conditions and the premium rates. See if the plan is suitable to you and then buy it.