12 August 2014 0 Comments

When You Want Term, But Conversion is the Only Answer

shutterstock_146949359 (2)I previously discussed how converting term insurance works.  It’s when you decide you no longer want term insurance and you exchange your term policy for a permanent policy without having to provide any current personal information to the insurance company.  The new permanent policy is issued in the same underwriting class as the term based on premiums for your then attained age.

Here’s an interesting scenario where a man purchased a $1,000,000 20 year term policy when he was age 32.  At the time he was a Preferred risk.  He is now age 52 and his 20 year term policy is coming to the end of its term.  If he does nothing the policy will continue as term insurance, but the premium will immediately quadruple and will continue to increase each year thereafter.  Since he has a second, younger family he still wants to maintain term insurance, but not at the “do nothing” prices of his current policy.  So, he looks for the best price for a new 20 year term policy.

But, that turns out not to be so easy.  In the past 20 years he has added substantial weight to his 6 foot frame and now weighs in at 285 pounds.  Additionally, his doctor has advised him to undergo a test to diagnose potential sleep apnea and he hasn’t gotten around to completing the test.  His agent tells him that just his height/weight classifies him as a Table 2 risk, but his current company declines to make any offer unless he completes the sleep apnea test. The agent shops the case to other companies and one company who is more lenient on build, will still rate him up to a Table 2 due to the question about sleep apnea.

He offers to complete the sleep apnea test to rule that out as a problem.  His agent wisely advises him not to do this before a new policy is issued because the results may push the Table 2 offer even higher.  He looks at the cost of converting his term to a permanent policy, but even though it can be issued in a Preferred rate class he just can’t handle the huge increase in premium.  At this point the agent reconfigures the premium on the Universal Life policy that is available through conversion reducing it to only guarantee coverage for another 20 years.  It is much less than the premium for a 20 year term policy rated Table 2.

Conversion comes to the rescue giving him an affordable term-like premium without having to provide any current evidence of insurability…and there is no new suicide or contestable period.

Next…the flexibility of Universal Life.

Leave a Reply