I don't think that it will convert to normal message itself when the other end of the recipient is not connected to the internet . When you tick " Send as SMS" , it means when you are not connected to the internet , the message will be sent as a normal SMS. Here is a scenario that I had gone through :

I sent a message to my friend using iMessage. He didn't reply me. I hold my message box , and the "Send message as SMS " option popped out . I send the iMessage using SMS again , and after a while , my friend reply me with SMS.

So I guess my friend is not connected to the internet, because when I SMSed him , he reply immediately.iPhone are not that advanced , it can't detect whether the other recipient is connected to the internet and choose which option to send. So next time if your friend didn't reply your iMessage, try sending a normal message by holding the message bubble and an option will pop out.