Term Life Insurance Conversion Rights Review
By James Tobin, CFP®
Expert Review Of Term Life Insurance Conversion Rights
Jim Tobin, CFP®
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Term life insurance conversion rights can be a valuable tool in your personal finance arsenal.
Now, if you currently have term life insurance, you know that at least until the term expires, you're covered.
What you may not know, is many term policies have the option to be converted to permanent life insurance without evidence of insurability.
What that means is no new medical with needles or urine exam to qualify.
The purpose of this article is to provide a background on policy conversion and how to make sure that your term conversions options are the best choices available.
If you know what you are looking for you can use the quick navigation table of contents to skip around.
What Is A Term Life Insurance Conversion Right?
Term life insurance conversion rights are clearly laid out in your term life contract.
However, the options vary wildly from carrier to carrier and contract to contract.
In its simplest form, a term life insurance conversion right allows the owner of the term contract to convert the policy to a permanent policy.
Where things get dicey, is the term life insurance conversion rights language of the term contact will stipulate the type of permanent policy that you may convert to.
This is all important, because if the language only allows you to convert to an unfavorable policy, then the option has little value to you.
What Types Of Policies Can You Convert To?
The term contract will generally spell out your options as "policies approved for conversion", specific named policies, or "any" permanent policy offered by the carrier.
Depending on the carrier, you may have whole life, or various forms of universal life (Ul,IUL,GUL) options available to you.
However, because many carriers have multiple offerings for each category, the conversion language laid out in the term policy will dictate your options.
How Much Will The Converted Policy Cost?
The cost of a converted policy will be determined by the policy pricing tables at your current age and the health grade you received for the term policy being converted.
Regardless of carrier this will undoubtedly be significantly more than you were paying for the term policy. So, for the conversion to make sense, there needs to be a compelling reason.
What Would Be A Good Reason To Convert A Term Policy?
There are three primary reasons that people convert term policies
- The term policy is expiring and the insured is not interested in the annual pricing increases of annual renewable term (ART), nor are they confident they can get through medical underwriting again.
- The insured has had a significant reversal in health condition and knowing they won't get through medical underwriting again, wants to lock in a lower permanent rate than if they waited until expiration.
- The third reason is the insured simply wants permanent life insurance as a cash value savings vehicle.
Two of the three reasons, the first two make the most sense. The insured is simply trying to make the best of a tough situation.
The third rationale, wanting to own permanent life insurance as a cash value savings vehicle, is a questionable reason to convert.
I am not against permanent life insurance as a low risk financial tool- actually I champion it. The people who say the returns are too low aren't doing a risk adjusted analysis. When risk/reward are both considered, I think it can be a great tool.
However, if using life insurance as a stable hedge against risk is your strategy, there are better ways to go about it than converting a term policy.
Good permanent policies are all about the policy design. Conversion rights do not as a general rule allow the advanced strategies of over funding and policy blending.
for this reason, I would encourage anyone interested in permanent insurance as a savings vehicle, to design a stand alone policy with an experienced agent.
Would It Be Better To Just Replace The Term Policy?
It may well turn out that even with a diminished health rating, you are able to replace your expiring term policy for significantly less than the cost of a permanent policy.
This will very much depend on your needs. if, for example you are in your early fifties with kids in college, you might simply want to cover your working years with a 10 or 15 year policy. Even with a lesser health rating, this would likely be far less than the cost of permanent insurance.
Consult With An Independent Agent Before Converting A Policy
Regardless of what turns out to be the right path to take, discussing your options with an independent agent makes the most sense.
If that sounds like I'm advertising for myself, it is because I am.
While underwriting on permanent products tends to be more lenient with lifestyle "table shave" credits available to turn substandard rates into standard rates, the truth remains that different carriers look at different situations differently.
This means that your condition may be a problem at one carrier but not at another that has more appetite for your particular risk.
This is a long winded way of saying that the more carriers you have access to the better the chance at a great rate- whether it be replacing an expiring policy or seeking out a permanent policy.
Your Next Step
Now that you know the information you need to make the best decision possible regarding your conversion options, it's time to gather the policy and speak to an independent Agent (raising my hand).
If you do decide to work with us, we are committed to totally transparent pricing (we'll even share our computer screen with you if you'd like), and making the application process as painless as possible.
Simply give us a call or shoot an email over and we can get you started. We are committed to giving sound advice, even when it means we can't work together.
If you have any questions, We'd like to hear them.