Life insurance conversion is the process of upgrading a term life insurance policy into a permanent life policy, under the original rating (or health classification) assigned to the insured.
For example, say you’re 65 years old, and purchased a term life insurance policy 10 years ago. At the time of policy issue, you were in excellent health and were rated at “Preferred Non Tobacco”. But in the past 10 years, you’ve developed sleep apnea and were diagnosed with diabetes. It would be difficult to secure a Preferred offer today.
Here’s where the life insurance conversion benefit kicks in. You can convert your policy to a permanent policy at the “Preferred Non Tobacco” rating, WITHOUT evidence of insurability. So you’ll pay what any other 65 year old will pay for the same policy, but in excellent health.
Factors that vary among life insurance conversion features:
Maximum age – each policy carries its own conversion limitations. For example, a Banner OP Term 15 policy can be converted to a permanent product, but only until the insured reaches the age of 70. Minnesota Life’s Advantage Elite Term 15 carries a maximum conversion age of 75.
If you purchase a term life policy, and there’s a possibility you may one day need permanent coverage, be sure to look at the max age… The older the max age, the better.
Availability and choice of Permanent policies
- Some policies allow conversion to ANY permanent policy
- Some policies allow conversion to a permanent policy of carrier’s choosing
For example, Ohio National has two types of term, regular or plus:
- 15 Year Term – converts to policy of carrier’s choice
- 15 Year Term PLUS – converts to ANY permanent policy
This conversion option is probably the most important conversion feature. If your term policy allows you to convert to ANY permanent policy, this is a good benefit, because in most cases, you will have your choice of converting to a low premium, guaranteed universal life plan, or a higher premium, cash accumulating plan.
But if your policy doesn’t give you the choice, you can guess which policy the company will likely allow you to convert to…. most likely their highest cost option.
If you’re shopping for insurance, be sure to ask your agent to read the conversion privileges to you and listen for whether to product is convertible to “any permanent policy without evidence of insurability”, or to “select permanent policies” or “permanent policy selected by XYZ insurance company.”
Conversion Credits
Some term policies carry a conversion credit, which reduces the premium payments on the new Permanent Policy by some factor.
- For example, Prudential Essential Term policies do not offer credits
- Prudential Elite Term policies offer credits – reducing the first year of premium for the new policy by the amount of the old term premium
All Term Policies we sell have some sort of conversion feature (Again, all term policies WE SELL. That doesn’t mean all term policies out there offer conversion priviledges. Primerica is one such company. Since they have no permanent products, they have no conversion.)
What about Hybrid Term/Universal Life Policy Conversion?
In a sense, these policies automatically “convert” to a permanent product. But be careful of classifying hybrid term-UL products (such as Genworth’s Colony Term UL or Protective Life’s Secure T series of products) as term policies.
These are not actually true term policies. They are built on universal life policy structure, and add a no lapse feature for a number of years, which makes the policy act like a term policy during the duration of that no lapse guarantee.
So at the end of the initial no lapse period, they don’t technically “convert”, per se. Instead, they simply revert to the UL function, losing the no-lapse feature. At this point, your premiums would increase, and the policy will function like any other universal life policy, needing cash to sustain the policy.
At the time of writing this article, the main three players in the term/UL arena are Genworth, Protective, and Transamerica, with their TransTerm UL.
If you need a term life insurance policy with strong conversion privileges, or have any questions about life insurance conversion, please call us at 877-443-9467. Thank you.
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