Whether you received a letter from your insurance carrier telling you can convert or you received a call from an insurance agent stating that you have the ability to convert, most of our clients really do not understand what it means or if they should do it. This article is designed to help answer the following questions
- What is a Term conversion
- What can I convert to
- Reasons to convert
So let’s start at the beginning when you first got your life insurance policy. You signed a lot of paperwork, had an examiner come to your home or office for your height, weight, maybe some blood. Then several weeks later you hear from your agent that you were approved for the insurance. He hands you the contract (Do you know where that contract is now?) and tells you the coverage is inforce. You feel good about this decision but probably have not thought much of it since. From time to time you might get a letter from the insurance company stating that you can convert the coverage, please call this 800 number or your agent for more details. Like most of our clients, the letter is read and discarded without much thought. Am I on track?
Question 1 – What does it mean “Term Conversion”
The first thing to establish is your contract is a term policy. This means your coverage will last for a certain amount of years. Typical lengths are 10-15-20-30 years. Next, when you first got approved for the insurance, you were given a health rating. The ratings range from the Very Best to uninsurable. (the names of the ratings will differ with each carrier). For this article, I will use the following rating names and assume non tobacco status.
- Preferred Best
- Prefer
- Standard Plus
- Standard
- Standard at 50% rating
- Let’s assume I have a $500K, 20 year term contract that I took out 2 years ago. When I was approved, the rating I received was a preferred non tobacco rating.
Now that we know the type of coverage and the rating, let’s answer the question, what does term conversion mean? To convert means you have the ability to change your insurance coverage from a term and make it into a permanent contract such as whole or universal life.
Using the example above, my conversion means that I can change the type of coverage (i.e. 20-year term which I could outlive) and make it into a permanent life contract. (Universal and whole life contracts are permanent insurance contracts that are designed to provide coverage for much longer periods of time) The cool part of this whole process is when I do convert, I do not have to do any tests or answer any questions regarding my health. The rating I get, is the one I received when I first got my policy.
Using my example above, I can convert my 20-year term to a permanent contract (i.e. universal or whole life) at preferred rates and I do not have to do an exam or answer questions about my health.
Question 2 – What type of product can I convert into?
Now that you know you can convert and at what rating, how do I know what product to use. Each insurance company has different rules as to what products can be used for a conversion. This part is where you will need assistance of an experience independent agent to help guide you. Once your agent finds out which products are available for conversion, a discussion with him and your specific needs to find the one or two products that fit your needs. From this point, he can get illustrations from the carrier to show you what the cost will be, how long the death benefit will last and if there is any cash value within the policy. Do not be afraid to ask questions or “what if” scenarios.
- What if I only want to convert part of my coverage?
- What if I change my mind?
- What if I convert, is there a waiting period?
Remember, your agent is working for you and not the insurance company.
Hopefully the above information has been useful so far. Maybe all the information has created another question that needs to be addressed
Question 3 – Why should I convert my policy?
The answer to this question will be different for each person. Typically, we have found there are 3 reasons for a conversion. The first may be the most obvious, which is health. Meaning that your health has changed for the worst and now you are uninsurable. Cancer, diabetes, and Alzheimer disease are just a couple of examples that would exclude you from getting insurance. With a conversion, there is no health questions so regardless of the condition; you will be able to convert to keep the coverage. Secondly, many of our clients have changed their mind regarding legacy. Like myself, when I first got my term insurance, I wanted to make sure that during my working years, my family would be able to maintain a certain standard of living if I passed unexpectedly. That was many years ago for me, now that I am closer to retirement , I fully expect to outlive my term coverage and want to make sure I leave something at some point. Thus, I converted some of my term when I was 48 years old. Lastly is estate planning or estate taxes. Often times life insurance is used with estate planning to either equalize an estate (i.e. daughters will get family business and life insurance is used to give to sons) or used to help pay for estate taxes upon the passing of mom or dad.
I know this is a lot of information and converting a contract is not a decision that needs to be taking lightly. Doing your research about the insurance company to ensure they are financial stable as well as working with an experienced independent agent is a smart move. Here at IFG-Atlanta, we are a full service organization and have helped many of our clients with this decision. Whether you use a firm like ours as a resource or another firm, do take the time to ask lots of questions to ensure the decision you make is right for you, your family and your situation.