Converting Life Insurance

June 2023 Newsletter | By: Ian Sachs, CFP®, CLU®, ChFC®
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Gears, Risk Resource

This month, I wanted to spotlight term life insurance conversions. We’re seeing an increase in popularity with new and existing clients exercising their conversion privileges. This includes the implementation of new term insurance policies for the purpose of converting them in the future.

Term life insurance provides inexpensive coverage for people to protect their families and businesses for a specific number of years. However, the original goals and intentions for policies may change over time.

Something that many policy holders are not fully aware of is that their insurance coverage likely includes conversion privileges. Term life insurance policies are usually convertible for most (if not the entire) term period and up to a certain age – often 65 or 70 – whichever comes first.

When a policy is convertible, it means that you can start a new permanent life insurance policy from the same carrier at your initial rate class without providing evidence of insurability. This is extremely valuable if your health has changed or worse, you’re no longer insurable.

Why Convert an Existing Term Insurance Policy?

  1. A Change of Health. Someone might find themself with a debilitating or even terminal health condition, and the life insurance benefit has become more tangible and definitive for planning purposes.
  2. A Change of Goals. The original term period might have made sense for several reasons. Perhaps it was to bridge the gap until retirement age or to fund a buy-sell agreement, but now there may be new needs or desires such as guaranteed tax-free liquidity, estate equalization, or planned giving.

Why Purchase Term Insurance for the Conversion Privilege?

  1. Cash Flow. The premiums for a permanent policy can cost on average 5-15x that of a term insurance policy. Term insurance might be favorable now so that an individual can acquire the right amount of coverage at a more affordable price today while locking in their insurability.
  2. Estate Planning. Similar to the above point, term life insurance with a multi-million-dollar death benefit (e.g., $10,000,000 – $50,000,000) is popular as a standalone or hybrid model to keep premium costs low while allowing conversion options later for estate tax planning.

The conversion privilege of term life insurance allows policyholders to adapt their coverage to changing circumstances. It provides a myriad of options and flexibility for planning purposes that otherwise might not exist elsewhere.

During times of economic uncertainty, changing legislation, or a declining health situation, people often desire the option to modify their life insurance policies to better align with their evolving needs and financial goals.

By converting a term policy, you can adjust coverage amounts, premium payments, and policy types to ensure that your plan remains an effective financial asset.

As a life insurance broker representing nearly all life insurance carriers, we can help you navigate your options with your existing term policy or develop new plans with a conversion privilege at the forefront.