We have been gutting term life insurance this week starting with a look at an actual policy. Being a contract as it is, there are plenty of definitions and clauses and options and such. So my previous posts didn’t get too hefty, I picked out a few items to discuss separately.
The conversion option is, I believe, one of the least touted, most understated benefits in a term life insurance policy. That option is detailed in the attached portion of my policy.
On the second page of this attachment conversion is spelled out. Cramming all of that half page down into a sentence, the conversion option allows you to convert all, or part, of your term policy to a permanent policy without evidence of insurabiltiy during the conversion period.
The holes this option can plug are endless, but let’s explore just a few recent cases. A man contacted me wanting to replace his term policy that was coming to the end of its’ guarantee. He had some significant health issues that included both a heart attack and prostate cancer. He had survived it all and is doing fine, but the cost of a new policy was pretty hefty as these were recent events.
We began discussing his current policy, the one with the guarantee that was running out. He had the policy for almost ten years and when he took the policy out he was approved at a preferred rate. Remember, conversion uses the rate class of the policy being converted. There is no evidence of insurability required. We ran quotes to convert enough insurance to meet his needs and were able to provide the coverage he wanted for substantially less than a new term policy would have cost.
In another case a client had a $250,000 term policy that he had purchased through me while he was still working. Now retired on a generous pension, he wanted less insurance but wanted a permanent plan. This was going to be his final expense policy. With no physical and just a one page request to change his policy, we converted his term policy to a universal life policy for $50,000 with a guaranteed level premium to age 100. If he lives beyond that, the policy is guaranteed to remain in force to age 120 with no further premiums.
On the last page of this attachment it shows that my term insurance policy has a guaranteed level premium of $1678 annually for 20 years. The guaranteed premium in the 21st year is $41,000 and some change. I had suggested before that a person might even consider paying that premium if they were terminally ill. That would still be my recommendation if they were beyond the conversion period.
But, if the policy is still in the conversion period, it could be converted to a permanent policy for just over $14,000 a year, guaranteed. And, unlike the annual increase in the term policy, if you happen to outlive expectations, the premium is then locked in at a level $14,000.
Bottom line. You’ve heard the analogy of sticking your finger in a hole in a dam. The conversion option in your term life policy has more fingers than you can count. It is flexible (all or part of the policy), stops health issues in their tracks (no evidence of insurability) and is guaranteed. I really, really like the conversion option.