No, not the religious kind. The conversion I’m talking about is the contractual provision in term life insurance policies that allows the owner to exchange it for a permanent policy with no evidence of insurability. While always a convenient feature, it is the “no evidence of insurability” feature that can make it invaluable.
I’m not certain that every term policy has a conversion clause, but I’ve never come across one that doesn’t. Traditionally, the conversion feature was valid until the insured’s age 65, but lately I’ve been seeing some that expire before then, sometimes as soon as ten years. The shorter the conversion period, the less valuable it is.
The conversion feature is convenient because it forgoes the underwriting process. The insured qualified for the insurance via the underwriting process when the term insurance was applied for, so s/he need not qualify again. An application and the first modal premium is all that is required, similar to the process to purchase a mutual fund.
While convenience is nice, the feature becomes valuable when the insured wouldn’t currently qualify for the underwriting classification received when the term insurance was issued because of a health issue.
Let’s look at an example. A 35 year old male in excellent health bought a $500,000 20 year term policy 19 years ago and qualified for the preferred underwriting classification.. He’s now 54 and his kids are emancipated, but there was a glitch along the way. He was down-sized during the 2008-09 financial crisis, and had to use a good portion of his retirement fund to stay afloat.
He quickly found another job, but had to borrow on his home equity to fund college costs, so he is interested in continuing the life insurance. There is a problem however. He is approximately 50 pounds overweight and is on medication for high blood pressure and cholesterol.
Because of the conversion provision in the policy, he can convert the term policy to a guaranteed universal life policy at preferred rates, which he could not medically qualify for. The annual premium for the new policy is a little over $10k, but were he to submit to the underwriting process, the annual premium he would currently qualify for would be in the $15-17,000 range.
As previously mentioned, all conversion provisions are not created equal. Some companies limit the duration while others only allow conversion to a few products.
In an ideal world, a conversion provision would only provide convenience, as our health would not decline, but we know that’s not always the case. In the situation where the insured still needs/wants the coverage and his/her health has declined, the conversion provision is very valuable indeed.