3 April 2012 0 Comments

What Obligations Do You Take On When You Purchase A Term Policy And What Are Your Options At The End Of The Term?

Last time, I discussed the pros and cons of Return-of-Premium (ROP) Term Life Insurance. In this entry, I’ll address your obligations when you buy a Term Life policy, along with your options at the end of the term period.

First, the obligations: You have no obligations when you buy Term Life Insurance, or for that matter when you buy any Life Insurance policy. In fact, you even have a free-look provision that allows you to cancel your policy within 10 days* of receiving it for a full refund of any premiums you’ve paid. You can decide to stop paying your premiums at any time.  Of course, if you do, your Term Policy will be discontinued, but no one will dun you, and your credit rating will not be affected.

*Number of days can vary by state and age of the insured.

What are your options if you keep a Term Policy to the end of the term period you selected and you want to continue Life Insurance protection beyond that date?  There are three possible options you may have that would allow you to continue coverage:

  • Conversion
  • Keep your current Term Life policy at an increased premium
  • Reapply for a new policy

I’ll discuss conversion here and cover the other two options in my next entry.

Conversion

Term Life Insurance is often convertible. This means that you can exchange your Term Life policy for a Whole Life or Universal Life policy with premiums in the same underwriting class for which you originally qualified. There’s one small catch: The Whole Life or Universal Life policy to which you convert will be based on costs for your age at the time that you exercise the conversion. You don’t need to answer any questions or take a medical exam, however. This can be crucial if you have had a health or other underwriting issue since the date of the original policy that affects your ability to qualify for a new one. These might include a heart attack, cancer, stroke, diabetes, or something as simple as a gain in weight or racking up a few speeding tickets. While you may still be insurable, you certainly wouldn’t qualify for a Preferred Risk rate. None of the aforementioned risks affect your conversion rights, however.

If your Term Life policy includes a conversion right, it usually remains in effect until the end of the original term period selected. Occasionally, a conversion right may cease after five years – even if the policy is for 10 or 20 years.  And conversion rights will generally not extend beyond a given age, such as 70.  Ask your agent about conversion rights. If you’re considering two competitively priced policies, but the slightly more expensive one has a longer conversion privilege, it may be wise to opt for minimally higher premiums in order to preserve your conversion right to a later age. Regardless, be conscious of the date on which your conversion right expires – and don’t let it slip you by.

If you’re planning to convert at a later date, your agent might tout one company over another because of its competitively priced conversion policies. While agents can tell you what policies and premiums are available for conversion today, they cannot tell you what they will be one, five or ten years down the line. Insurance companies only have to provide a permanent policy for conversion, not a competitively priced permanent policy.  Insurance companies aren’t really interested in attracting conversions. They know that people who want to convert are likely to be in less than pristine health. As a general rule, however, the policies available for conversion have to be reasonable – otherwise, all of the healthy risks will go elsewhere.

There are exceptions to this rule. Just a few years ago, CNA and Midland Mutual issued some of the most competitively priced Term Life Insurance policies on the market. They also offered low prices for Permanent Insurance policies that were available for conversion. Shortly thereafter, both companies discontinued new sales and sold their existing policies to a reinsurance company – one that wasn’t interested in new sales. Since then, the only policies available for conversion are non-participating Whole Life Insurance with non-competitive premiums.

Coming Up Next: More Options at the End of the Term Period

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