A term conversion is a contractual obligation a client has, to convert his or her term policy to that specific carrier’s permanent product(s) without having to go through underwriting again. Each carrier has its own specific rules for term conversions, with some carriers having more favorable options over others. For instance, some carriers will allow conversion to their entire permanent portfolio for the entire level term period, up to maximum age (could be anywhere from 65-75). For those clients that value having these better conversion options, it important to take note of the term conversion guidelines when looking at term policies when first purchasing. Typically, the carrier will allow the insured to convert to the permanent policy at the same rate class he or she was approved at the term policy. However, we have seen carriers downgrade an insured’s rate class if the rate class on the term no longer exists. An example of this is the fact that many carriers no longer have a standard plus non-tobacco rate class and thus will have the insured converted at standard non-tobacco instead. Although this doesn’t seem like a big deal, we are seeing more and more carriers downgrade their conversion options. Some carriers have shortened the period when a client can convert to the more competitive term products. For instance, a client with a 20-year term policy will have 10 years to convert to those better permanent products. After that, the carrier will only offer a designated less competitive product for conversion. American General and Lincoln both have similar guidelines for their term conversions. Although the designated term conversion product is ok, wouldn’t you want your client to have full access to the most appealing permanent policies?
The point of mentioning all of this, is that when selling term, looking at the conversion options can be overlooked. Most client and advisors are looking for a competitive premium with a dependable carrier that will give the best experience when going through underwriting. All of that is very important. But what about 10,15, or 20 years from now when your client is wanting some form of permanent protection but has had some health events that prevent him/her from obtaining a decent rate class. Or even worse, he or she is not insurable. Now that term conversion option becomes invaluable. It would be a shame if the only option available to your client is some product that the carrier designed specifically for conversions only. In most cases you will see an inflexible type UL or very expensive whole life product.
When it does come time to decide whether a term conversion makes sense for your client, you should consult with either Peter or myself. Many of our carriers have unique products where we can customize the product to best fit your client’s needs. Most of us will have a tendency to run these conversion products with coverage running till age 120. Although that might be what your client is looking for, a lot of times we can save them quite a bit in premium by solving for a shortened duration in coverage. This can be especially valuable if you and your client have to use one of the designated conversion products. The lifetime premium will most times be very pricey. However, some of these products (UL’s) will have a much more reasonable premium when solving through age 85,90,95.
Given the trend of carriers to make term conversions less appealing, now is the time to look at these options for your clients. We are happy to do the research for what options your client would have available to them. Don’t hesitate to tell your clients about this even if they are early years of the term policy. Partial conversions, where a client converts a small portion is common(ex: client with $1M term converts $200k to permanent). This can ultimately save your client premiums by having them convert to permanent when he or she is younger.
By: Patrick Swayne, CLU| Vice President- Sales