Term life insurance conversion is one of the most overlooked options of a term policy. But what exactly is life insurance conversion and how does it work?
What is term life insurance conversion?
Almost every term life insurance policy has an option to convert from a term life policy to a permanent policy (either whole life or universal life). Here are some important facts to know about a life insurance conversion:
- There is no additional underwriting needed to exercise this option. That means even if you are uninsurable today, you can still change to a permanent policy.
- You will get the same rating as you have on your original term policy.
- Your premium will be based on your current age.(Back dating may still be allowed to save age and have a lower premium.)
- You can convert all or part of your policy (as long as you convert at least the minimum required face amount of the new permanent policy).
- If you convert part of your policy, you may be able to keep the balance of the term policy in force.
- The requirements are minimal and you cannot be declined.
Why is life insurance conversion important?
Life insurance conversion is important because if your health has changed your insurability may be affected.
Let's say you have a 10 year term policy at a preferred rating. During the term period, you are diagnosed with a medical condition that will cause you to be declined by all carriers. This means the only kind of coverage you would be able to buy is a guaranteed issue policy. These policies are small face amounts, usually a maximum of about $10,000 and more expensive than an underwritten policy. This is a situation where conversion is a benefit you would be very happy to have! It's pretty black and white.
Let's go back to you have a 10 year policy and again, you are diagnosed with a medical condition. This condition is insurable, but at a higher cost. You can apply for a new policy, and if you get permanent coverage, we may be able to get you coverage with a special program that improves your rating to standard. However, you would most likely do better price wise with a conversion, because your rating was preferred.
Now, you know you will need coverage for a longer period of time...what do you do?
- You check your current policy to see when your conversion option ends.
- If you can still convert, you talk to your agent to discuss your choices. Are there multiple policy options? Can you afford to convert all of your coverage? If you do a partial conversion, will you keep the rest of the term insurance or let it end?
- Do you convert now or wait until later in the conversion period? You need to see the difference in price to see what makes the most sense.
- If you don't really want a permanent policy, it's a good idea to apply for coverage before your conversion period ends, just in case you aren't rated as well as you had hoped. Then you still can convert if that's the best option.
- There are two types of permanent policies- universal life and whole life. Some companies will only let you convert to whole life, which is generally a more expensive policy. Some carriers allow you to convert into any permanent product they offer. Some limit you to one or two. As you can imagine, this makes a significant difference.
- A few policies do not allow any conversion. Most allow a minimum of 5 years up to the level term of your policy (5, 10, 20 or 30 years) with an age maximum.
- How long a carrier allows conversion is another factor. Some allow you to convert up to age 75 although most stop at either age 65 or 70.
- One company has a good conversion option for the first five years, then one not as good for the rest of the conversion period.
You can see why it's so important to understand your conversion options before you purchase your term policy. It's important if you think there's any chance you will want to convert. It's also important just to be prepared in the event something changes in your health.
Real conversion stories
We recently had a client who was coming to the end of the level term period on a 20 year policy. We discussed his needs and then spoke with our underwriter as this client had some medical issues. We expected that he would qualify for new coverage.
His application was still in underwriting when his conversion period was ending. He exercised this option and did a partial conversion (for the amount of coverage he was applying for with the new application). He paid one month's premium so he had coverage during underwriting.
Well, unfortunately his new application was declined. The good news is that he now has a permanent policy with a standard rating. It will stay in force for his lifetime and the face amount and the premium will remain unchanged.
We currently have a client with a similar situation. He is still in underwriting on his new application. He wants a 10 year term. If he can get it, the premium will be about $100 per month less than the permanent policy. But he wants the coverage, so whichever way it works out, he knows he is covered.
The Bottom Line
The conversion option is a valuable addition to any life insurance policy. There is no cost for this option. If you need to exercise it, you and your family will be thrilled that your important coverage can remain in force!