What Is a Conversion Option and Is it Right for Your Client?

  • October 31, 2012
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A conversion option is the contractual right of a policy owner to convert a term insurance policy into a permanent or cash value policy without any evidence of insurance. Historically this has been an unconditional contractual right of the policy owner. But as term insurance pricing has become more competitive, term insurance policies now don’t necessarily have a conversion option and even when they do, they can vary dramatically. 

Generally, people who have a health condition that may lead to premature death and would not be able to qualify for a new term insurance policy are more likely to want the flexibility of a conversion policy. Because these types of policyholders are riskier, they are more expensive to insure. 

Today, most conversion features limit convertibility to the term of the policy (i.e. 10 years, 15 years or 20 years) or it lapses after the policyholder reaches a certain age. For instance, many carriers limit convertibility to age 70. So if a 57-year-old buys a 15-year term plan, the policyholder would be able to convert that policy only during the first 13 years of the term before turning 71. On the other hand, if that same 57-year-old buys a 10-year term plan, it would be possible to convert any time during the life of that policy. 

While these limitations have become the norm, in some cases if a policyholder has a term policy in a carrier's best underwriting class (usually referred to as "super preferred" or by a similar term), some carriers may extend conversion to age 75. 

Two types of restrictions on conversions can lower premiums. These, however, are not the norm and it is critical you understand these restrictions as you advise your clients. 

The first and more drastic option is removing the conversion feature. This is uncommon, but such policies do exist. 

Without a conversion feature, your client will have no alternatives if poor health prevents him or her from buying a new term insurance policy after an active policy lapses. By omitting the conversion feature, a carrier can lower its price to the absolute minimum. However, the difference between this price and the price charged by a carrier with a conversion option is usually negligible and frankly not worth the risk to the client. 

The second alternative features elements of both a conversion and a non-conversion policy, allowing conversion only during the first few years of a policy. This decreases the risk to a carrier because your client is likely to be healthier in the early years of a policy and less likely to convert.  However, because the majority of term policies with major insurance carriers have broader conversion options, purchasing this type of policy may be questionable. Find out what conversion features are available and outline them to your client. 

Talking to your clients about their needs and potential risk factors will enable you to advise them on whether a policy with, or without a conversion option is prudent for them. If your client believes a policy without a conversion option is in their best interest, you should inform them of the restrictions prior to purchase, because once a policy is sold a conversion feature cannot be added. If a conversion feature is not included at issue, one can only be obtained by purchasing a new policy.

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