Converting a term life insurance policy can be a valuable benefit. However, it is often overlooked.
Most term life insurance policies include a feature allowing the policy owner to convert coverage to a permanent policy. Convertible term life insurance policies can usually be converted during the: (1) guaranteed term period, or (2) an age specified in the policy, whichever comes first.
The age specified in the policy is usually age 75 but can vary. Your policy should include information specifying what conversion options are available, and what age your policy may be convertible to.
When converting term life insurance under the conversion option of an existing policy, you are only able to convert to a permanent product from the same company that issued the original term life insurance policy.
Reasons to Consider a Term Life Insurance Conversion
A term life insurance conversion is not for everybody. However, there are situations where a term life insurance conversion not only makes sense but might be the only option.
The primary reason people consider a term life insurance conversion is because converting their existing coverage is less expensive than what is available in the marketplace.
This could be for any number of reasons. The main reason usually being the health of the insured has declined since purchasing the term policy. And, the conversion makes the most economic sense.
For example, our client Joe is four months away from the conversion option on his policy expiring. Joe still has five years of coverage left on his existing term policy, but Joe thinks he might need coverage beyond five years.
Joe wanted to know if it made sense to convert his existing term life insurance policy or if he could get less expensive coverage.
We submitted Joe’s medical records to more than ten different life insurance companies. Because Joe recently had a stint put in his heart, none of the carriers were interested in offering Joe coverage.
Since Joe does not medically qualify for “new” coverage, conversion of his existing term life insurance policy to permanent coverage makes the most sense.
Most people consider a term life insurance conversion just prior to the expiration of the conversion period. If your term life insurance policy offers a conversion option, the policy will provide the specific rules, deadlines, and provisions of that policy’s conversion privileges.
How Does a Term Life Insurance Conversion Work?
When a term life insurance policy is issued, the premium is based on four components:
- Face Amount (or Death Benefit)
- Length of the Term (e.g. 10, 20, or 30-years)
- Age at that Time, and
- Your Health Class (or Underwriting Class)
For example, let’s say you purchased a $3 million, 20-year term life insurance policy when you were age 45. At that time, you were the picture of health. Your health was so good your policy was issued at a super preferred underwriting (health) class.
The result is $3 million of term life insurance protection at a $3,136 annual cost. Pretty good deal!
Fast forward almost twenty years. You’re now Age 65. The guaranteed period on your term policy is close to expiring. You no longer need $3 million of coverage. But, you do recognize it would be beneficial to have $1 million.
Your health has changed. Two years ago, you had a major health scare. You are no longer able to qualify for “new” life insurance coverage. Even if you could qualify for new coverage, you certainly wouldn’t be super preferred like you were twenty years ago.
So, what do you?
Well, if your policy includes a term life insurance conversion option, the first step would be to understand what conversion options are available. Each life insurance company has its own set of guidelines on term conversions.
Several carriers will allow you to convert to any permanent product they offer to the public. While other companies limit your conversion options by only offering a single policy for conversion.
Carriers offering a single policy for conversion do so intentionally to discourage conversions by making the policy very expensive.
Many carriers do reserve the right to limit term life insurance conversions to a single product. Some choose to do so, while others do not. Some carriers will allow you to convert to any permanent policy in the first 5-years but maintain the right to limit you to a single permanent policy thereafter. That does not mean they execute that right, but do have the legal authority to do so. Again, it depends on the language in the policy.
What Does Converting a Term Life Insurance Policy Cost?
The answer is it depends. There are several factors that affect premiums. The most common is the death benefit, age at the time of purchase, health class, etc.
However, conversion to a permanent policy is based on your health class when the term policy was issued. Life insurance companies do not require you to go through underwriting when converting an existing policy.
Also, you do not have to convert all the coverage. If you have a $3 million policy, you can convert as much (or as little) as you want up to $3 million.
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Final Thoughts on Term Life Insurance Conversions
The reality is if you need (or think you’ll need coverage) beyond the guarantee period of your term life insurance policy AND cannot medically qualify for less expensive coverage – you should consider a term life insurance conversion.
Many people considering a term life insurance conversion are doing so because they will likely never medically qualify for life insurance in the future. Converting a term life insurance policy is often the last chance people have to secure and maintain needed life insurance coverage.
Owning a convertible term life insurance policy is like owning an option on your insurability. Even if you don’t medically qualify for coverage in the future you can execute the option because you have guaranteed your insurability.
Like most decisions, choosing to convert your term life insurance policy is personal. What may be right for you may be completely different for somebody else. But, before losing the privilege of converting your term life insurance policy, it is important to make an informed decision.
Making an informed decision starts with understanding your conversion options. By working with an independent life insurance consultant, you should have access to all the information you need.
If you have questions about your term life insurance conversion options, please email us at email@example.com.