– By Marc Schwartz
Term life insurance sales in the US consistently represent about 70% of the total death benefit bought by consumers every year, according to the Insurance Information Institute. And for many of those buyers, the provision to convert their term insurance into permanent life insurance somewhere down the line represents an important option. But according to several leading term insurers, less than 5% of term life policyholders ever take advantage of this option, and those who do often are motivated by deteriorating health. Because these clients have a mortality risk of about five times normal for their age, life insurance companies have dabbled with creating limitations on conversion options (limited time frames to convert, restricted product choices, lower maximum ages) to decrease the impact of anti-selection on pricing and margins. Understandably, these same insurers need to balance these limitations so as not to impact sales significantly. So what’s a company to do?
Among efforts to solve this conversion quandary, there are currently three primary camps. First are the “wait and see” or “no change” carriers. These carriers continue to offer conversions for the full level term period to any permanent product currently available for sale up to a maximum conversion age. Second are the “hybrid” carriers, companies that limit the conversion in some additional way. They might allow conversion to any permanent product currently available for sale, but only for a limited number of years — then require a conversion only product. They may also offer a buy up option (higher price) allowing the policy owner to convert for the full level term period (up to a maximum conversion age) to any permanent product. Third are the “conversion product only” carriers. These carriers restrict conversions to a specific product.
At present, most carriers continue to allow their full suite of products for conversion throughout the entire level term period. One carrier even allows conversion beyond the level term period when annual rate adjustments occur. However, with the spotlight on mortality as a major driver of carrier profitably today and the possibility for significant excess, underpriced mortality, a number of carriers will choose more restrictive conversion practices, such as “hybrid” or “conversion only” options. Lastly, you might think that current term policy owners are unaffected by this issue, because their conversion provisions are contractually locked in. But that’s not the case. Term policy contract language typically allows the insurer to change or modify its current conversion practices even for in force blocks of term policies.
It isn’t easy to sort all this out and explain it to your prospects and clients. Windsor’s Term Conversion Quick Guide can help you sort through the term conversion practices of various major life insurance companies, to see which best fit your clients and fairly compensate you for your time, effort and professional advice.
To learn more or to discuss specific cases and clients, call Windsor at 800.410.9890.