Term insurance provides affordable life insurance protection for a specified period of time like 10 or 20 years. One of the selling points agents often make when selling term insurance is that you can effectively lock in your future insurability through a feature called conversion. A conversion is
essentially trading all (or a portion) of your term insurance policy for a permanent life insurance policy. For example, you could convert a $1 million term policy to a $1 million permanent policy without having to qualify medically for the permanent policy because of the conversion feature. Thus, you can protect against a decline in health making life insurance unavailable or unaffordable because the conversion feature removed the health qualification obstacle. Another element of a conversion was that your new permanent policy would be issued at the underwriting class of your term policy. So, a term policy issued at the best non-smoker rates could convert to a permanent policy priced at best non-smoker rates even if you smoke a pack of cigarettes a day, have diabetes, and are 100 pounds overweight. Sounds great, right? What could possibly go wrong? Well, life insurance carriers have finally realized that the majority of people who convert a term policy aren’t healthy. So, the carriers end up paying a death claim sooner than they would for that underwriting risk class. Said another way, it’s a losing proposition for the carrier. As a result, carriers have started exercising contractual rights to make this conversion feature less desirable by taking two key actions:
- Reducing the time period during which you can elect to convert the policy
- Limiting the permanent policy to a grossly over-priced permanent product. These two dirty little term conversion secrets can result in either the inability to convert to a permanent policy (so loss of coverage) or the new permanent policy costing more than double what it should cost absent these carrier actions (unaffordable coverage). Both are intended to discourage the conversion. What’s even worse is that the contract language allows carriers to take at least one of these actions on policies issued 5, 10, 15 or even 20 years ago!!! In many cases, clients who have a fair degree of medical challenges may be better off to avoid the conversion and buy a policy requiring medical qualification. So, before you convert, do your homework. You might just save a meaningful amount of premium by avoiding the conversion.