Yes, Your Term Life Insurance Company Can Do That!
Did you know that an insurance company can often restrict the policy you can convert your term policy to in the future? That’s exactly what a major insurance company recently announced for a group of inforce term policies. “Conversion” means that by contract, a term policyholder has the ability to convert the term policy to a permanent form of insurance designed to last for lifetime. This is an important,but often overlooked, aspect when applying for term life insurance. Before the announcement a policyholder had a right to convert their term insurance policy, with NO medical underwriting or evidence of insurability to ANY of the insurer’s permanent product portfolio. The insurer is now going to restrict conversions for term policyholders to a single, Conversion Universal Life policy. The Conversion UL product is extremely expensive compared to the other life insurance products offered by this insurer. This is not the first insurer to do this and certainly will not be the last. So why the alarm?
An Example
Let’s look at an example of a Male age 65 with an existing term policy issued at a Preferred NonTobacco underwriting class who wants to convert a $1,000,000 term policy and pay premiums until he’s age 100. As shown in the table below, he has two product choices for conversion today that could provide coverage at premiums of either $27,552 or $30,985 under relatively conservative design assumptions. However, if only the Conversion UL product were available, the premium would be $41,157. That’s an increase of 33% to almost 50%!
Can They Really Do This?
Yes. Contract language in a term policy dictates the rights of the insurer, and in our experience, the language in most policies usually gives the insurance company the ability to restrict the products available for conversion at some point. For example, the contractual right to convert to “any product” can be dramatically altered by a seemingly innocuous inclusion of a phrase such as the right to convert to “any product made available for conversion”. The phrase “made available for conversion” is what gives the insurer the power to choose what products it allows you to convert to rather than having to allow you access to the entire portfolio.
The Good News
The announcement applies to a specific group of policies issued by this insurer. The good news is that in this case, the insurer has given policyholders that may wish to convert a generous window before having their options limited to Conversion UL. Many times, announcements like this only give policyholders weeks to make a decision. This time we have months in the event this announcement impacts you or one of your clients.
What Are My Options If I’m Ready to Convert
If your policy still has a conversion period open, you can choose to convert to one of the currently available products with NO medical underwriting or questions. This can be advantageous to anyone who is insured at a favorable health rating but may have experienced a decline in health since the policy was issued. If you are still in favorable health, it may make sense to go through medical underwriting to explore all alternatives available in the open marketplace.
What Are My Options If I’m Not Ready to Convert?
You can choose to do nothing, and your future conversion option will be limited to the Conversion UL product, or you can simply allow your term policy to end at the end of its level premium term period.
Alternatively, if a broader range of conversion options is important to you and you’re in good health, you may consider new term insurance with stronger conversion language. It will likely be more expensive, but it will give you more options down the road.
Another choice is to explore underwritten options with other insurers at the time you consider converting to Conversion UL in the future. In the past, when we have compared these single choice conversion products to what’s available for newly underwritten products, we’ve found the single choice conversion product premiums are equivalent to substandard (a.k.a. rated and comparatively expensive) premiums for newly underwritten products. In the graph below, you can see that the Conversion UL premium of $41,157 which converted at Preferred in our example is more expensive than the guaranteed premiums for five other insurance company products assuming the insured could only qualify as a substandard Table B risk class today. That’s a significantly lower health profile. If you qualified anywhere between Table B and Preferred, you’d probably be better off finding new coverage elsewhere.
Key Takeaways
If you have a term policy now and desire permanent insurance in the future, you should check the conversion options available. If your insurer only offers a “Conversion UL,” run fast if you are healthy enough to do so!
If now isn’t the right time for conversion for you, but you want to have better conversion rights in the future, you may need to explore new term coverage with better contractual conversion language.
If you’re looking at buying new term coverage, pay attention to the conversion language in the contract. Just because an agent says you can convert to anything today doesn’t mean that’s what the contract says. It may simply mean that’s what the insurer allows today, but the insurer could change the rules down the road. Ask to see the contract language when in doubt.
Examples are hypothetical and for illustrative purposes only, individual results will vary. The material is for informational purposes only and is not intended to provide specific advice or recommendations for any individual nor does it take into account the particular investment objectives, financial situation, or needs of individual investors. Colton Groome Insurance Advisors does not provide tax or legal advice. The material is not intended to provide and should not be relied on for tax or legal advice. Any information contained herein is of a general nature based on the information that has been provided to us. You should seek specific advice from your tax or legal professional before pursuing any idea contemplated.