What is the term life conversion option?
The term life conversion option is a feature available with many term policies. In general, while the policy is in force you may surrender it for a new policy provided:
- You request conversion in writing prior to the conversion date shown in the policy specifications
- You are not totally disabled as defined in any rider of the policy providing waiver of premium
Most importantly, the conversion option offers you the ability to lock in a new long term rate with no evidence of insurability. This means, it does not matter if you have a current medical condition, you can still convert to a new policy. There will be no health questions, medical exam or labwork needed.
In addition, your new conversion policy rate class will be the class your original policy was approved at.
This is a huge benefit to someone that has had a health change during the original term period of their policy.
What policies can you switch to with the term life conversion option?
The new policy will typically be any level premium life or endowment plan that is being offered by the company at the time of conversion. The new plan cannot be another term policy. The term life conversion option can only be used to go to a permanent plan of protection.
Each carrier will have their own conversion policies that are available. You can only convert up to the maximum death benefit of the original term plan.
Some companies will offer different plans of coverage to convert to while others may only offer once choice. This is why it is so important to not only choose a term plan that is affordable, but also one that offers excellent conversion options.
Many people make the mistake of just choosing the lowest cost term plan. They should understand all the conversion options available when reviewing their choice for term coverage. They should also be sure to select a carrier with an excellent rating.
How are rates calculated using the term life conversion option?
Typically, when someone wishes to convert their term life policy a new quote illustration will be run. The rates for the conversion will be determined by a couple of factors:
- Current age or nearest age 6 months
- Original underwriting risk classification
- Amount of original death benefit that wants to be converted(most policies allow conversions of less than full death benefit)
- Plan type that is available for conversion
Once the new rates are calculated the paperwork is completed and signed and submitted with a copy of the illustration.
Since there is no new underwriting, the paperwork is checked for accuracy and a new policy is issued. The policy will have a new effective date as of the date of the conversion. The new premium is collected and the conversion is complete.
Sometimes a policyholder may wish to do a term life conversion for less than the full death benefit of the original term. The remaining death benefit on the original term can then be continued at a reduced premium cost or discontinued.
When should you consider using the term life conversion option?
Probably the most frequent use of the term life conversion option is when there has been a change in the insured’s health status. A major change in health may not offer the insured an affordable way to purchase new insurance.
Many times an insured may simply not want to go thru the underwriting process. The term life conversion option allows for them an easy way to keep coverage when the original term is getting ready to end.
Other times that the term life conversion option can be used is for a business policy. An example may be that an employer purchased a policy on a key employee and paid premiums over a great number of years. If the employee decides to leave the business, the business owner could choose to exercise the term life conversion option and keep the coverage on a permanent basis.
This option allows the business to recoup the cost of premiums and indemnify the business when the employee passes. Since the business is typically the owner and beneficiary of the key man policy, this can make good business sense.
An insured should also consider and know the age that a term life conversion option expires. Most term life policies allow conversion up to ages between 65 and 75.
It is important to note though that many policies will only allow conversion during the original level term period.
For instance, what if you purchased a level term period for only 10 years? If the conversion option was only available for the initial level term period, then purchasing a level term at age 45 would only allow the conversion option to age 55.
It is very important to understand the exact language of the conversion option for the policy you are considering.
Real life scenario of using the term life conversion option
Joe is 42 and purchases a 20 year guaranteed level term policy for $500,000. Joe’s plan was to keep the maximum amount of coverage necessary while his kids were growing up and until the mortgage got paid off. Joe is happy with the low cost rates on his term policy and has no real need to consider the conversion option.
Fifteen years into the 20 year level term plan Joe has a heart attack. He eventually will require triple by-pass surgery and be placed on medication for diabetes. Joe meets with his life insurance agent on a regular basis. Upon sitting down with his agent, Joe asks what happens to his life insurance at the end of his 20 year term.
His agent explains that after the 20 year term has expired his rates will increase dramatically higher and continue to increase each year thereafter. His agent, aware of Joe’s recent health changes,tells him about the conversion option that is available.
He explains that he could convert any amount of his current $500,000 plan to a new guaranteed level premium plan. And best of all, he explains how the new conversion plan requires no medical evidence of insurability.
He tells Joe how the original underwriting risk class of super preferred non-tobacco rates would be used to calculate his conversion rates.
Joe originally purchased the term policy thinking he would only need it for 20 years. But now, with his current medical situation and the fact that he has had to take early retirement, now wants some protection for his wife going forward longer than planned.
He knows that he was unable to save as much as he would have liked for retirement. He worries that if something should happen to him his wife would need additional income in order to continue her lifestyle. He also wants to be able to help out his kids and grand-kids with funds if he were not around.
Joe ask his agent to illustrate rates converting $250,000 of his current $500,000 policy. After reviewing the rates for the conversion, Joe fills out a couple of forms and the conversion is complete. Joe also decides to continue the remaining $250,000 of term coverage until the term expires.
This gives Joe much comfort in knowing that he stills has $500,000 of total coverage for another 5 years, along with $250,000 of coverage for the rest of his life. Joe was thankful that his current term policy offered him the ability to continue coverage with no proof of medical insurability.
If you have a current term policy and are not sure if it offers a term life conversion option or if you simply want to look at term policies that offer the conversion option then contact us at 1-888-393-9003 or mike@specialriskterm.com
