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What kind of life insurance starts out as temporary coverage but can be later modified to permanent coverage without evidence of insurability?

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What kind of life insurance starts out as temporary coverage but can be later modified to permanent coverage without evidence of insurability?

 Options:

A) Endowment policy
B) Limited-pay whole life
C) Convertible term
D) Decreasing term

The Correct Answer Is:

  • C) Convertible term

Convertible term life insurance is the correct answer because it allows policyholders to start with temporary coverage, typically in the form of a term life insurance policy, and later convert it into a permanent life insurance policy without requiring evidence of insurability. Let’s delve into why this answer is correct and why the other options are not.

Convertible Term Life Insurance (Correct Option – C):

Convertible term life insurance is a versatile policy that combines the benefits of both term and permanent life insurance. Initially, it provides temporary coverage for a specified term, often ranging from 10 to 30 years.

During this term, the policyholder pays regular premiums, and their beneficiaries are entitled to a death benefit if the insured person passes away within the term.

The key advantage of convertible term life insurance is its conversion feature. Policyholders have the option to convert their term policy into a permanent life insurance policy, such as whole life or universal life, without the need for a medical exam or providing evidence of insurability.

This is particularly valuable if the policyholder’s health has deteriorated since they initially purchased the policy, as it ensures that they can maintain coverage for life.

The conversion option typically comes with certain limitations, such as a specified conversion period and a predetermined conversion factor. Nevertheless, it offers policyholders flexibility and peace of mind, making it a suitable choice for those who want temporary coverage initially but may wish to secure permanent coverage later in life.

Endowment Policy (Option A):

Endowment policies are a form of life insurance that provides a death benefit if the insured person passes away during a specified term. However, unlike convertible term insurance, endowment policies are not designed to be converted into permanent coverage.

Instead, they are primarily savings or investment instruments with a guaranteed payout at the end of the policy’s term, known as the endowment period.

While endowment policies offer a cash value component and a guaranteed payout, they do not allow for the conversion to permanent insurance. Therefore, option A is not the correct answer to the question.

Limited-Pay Whole Life (Option B):

Limited-pay whole life insurance is a type of permanent life insurance where policyholders pay premiums for a specified period (e.g., 10 or 20 years) or until a certain age (e.g., 65). Once these premium payments are completed, the policy remains in force for the insured person’s lifetime.

However, this option does not start as temporary coverage; it begins as permanent coverage from the outset.

Unlike term insurance, limited-pay whole life insurance does not have a temporary phase that can later be modified to permanent coverage. The policyholder commits to making a set number of premium payments to fully fund the policy, and there is no conversion feature to change the policy type. Therefore, option B is not the correct answer.

Decreasing Term (Option D):

Decreasing term life insurance is a type of term insurance where the death benefit decreases over time while the premium remains level. It is often used to cover specific financial obligations that decrease over time, such as a mortgage.

While it does provide temporary coverage, it lacks the conversion feature needed to modify it into permanent coverage.

Decreasing term insurance is designed for a specific purpose, and its primary function is to provide a decreasing death benefit over the term of the policy. It does not have the flexibility to convert into permanent coverage. Therefore, option D is not the correct answer to the question.

In summary, the correct answer to the question is option C, convertible term life insurance. This type of insurance starts as temporary coverage but can be later modified to permanent coverage without requiring evidence of insurability.

The other options, such as endowment policies, limited-pay whole life insurance, and decreasing term insurance, do not possess this critical conversion feature, making them incorrect choices for the scenario described in the question.

It’s essential to understand the features and benefits of different life insurance policies to select the one that aligns with your long-term financial goals and protection needs.

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