A few days ago I was on a bit of a rip over the subjects of conversion privileges and how far too many companies are changing products offered to non guaranteed UL’s, rather than permanent products.

The answer lies somewhere in a slight of hand the companies are using to call a life insurance permanent even though it is guaranteed only ten years. Some are only guaranteed five years, some even less. The crux of this matter really comes from what the conversion option used to be and why people use conversion options.

I can tell you that 30+ years ago there was no question what the conversion privilege was and what it meant to the clients and the agents and the companies. To paraphrase where everyone was at back then, “You may exchange this policy for any other policy that the company has at the time of conversion without evidence of insurability, at the same rate class that the original policy was approved”. Very straight forward. The companies drilled this into agents because conversions were always to a policy with a longer guarantee and it meant that, without the cost of underwriting, the company could almost instantly be making more money from the client.

Then came the term wars of the last 20 years that drove the price of guaranteed term down to “hard to believe” low premiums. Longer term guarantees came into existence with 30 years and longer becoming available. Then came the advent of the external guarantee no lapse universal life, for lack of a better description, a lifetime guaranteed term policy. There was no cash value and they became and still are the best and hottest permanent policies available. The price was substantially less than any other guaranteed permanent policy.

The problem it appears is that the company’s actuaries were asleep at the wheel and now claim to be their own victims of adverse selection if they continue to allow people to convert term policies to no lapse UL’s.
Although I have had several company representatives tell me that in fact the mortality experience on conversions after the fifth year of term policies is too high to allow conversion to low priced products, none have shown the numbers to back that up. Personally I think they are afraid the sky is falling when in fact they have nothing to prove that claim.

When I sent a list of questions to the NAIC, National Association of Insurance Commissioners, asking what information they might be able to offer on the subject, the answers were less than helpful.

They asked that I not quote their answers, but believe me, quoting the answers would only confuse the situation. It would appear from the answers that the NAIC isn’t much more than a fraternity of sorts. They have no power and claim that they don’t review products, rates or practices of insurance companies. While they do take some stances on issues (they didn’t give me an example), each state is free to adopt it or not.

Bottom line. So, the NAIC stance on conversion, well, doesn’t exist. I say this with all the urgency I can muster. Call your agent and ask what your life insurance stance on conversion is. Ask them to run you an illustration every year of what’s available and to warn you if they hear of any changes.

Good example. Myself. I stay on top of my conversion options and some have changed (Genworth) and others still offer guaranteed UL conversions. But I found out today that my North American policy, while convertible to a guaranteed permanent policy, loses the accelerated death benefit upon conversion. What’s with that?

You can bet I’ll be asking soon.

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