| Term life insurance is frequently treated purely as a commodity: purchased solely on the basis of the cheapest price. Yet other factors can drastically alter the value and effectiveness of a term policy.
Perhaps the most important differentiating feature of a term policy is the conversion provision. Although many term policies are never converted, conversion usually occurs under difficult circumstances. The insured is often in poor health and has no reasonable way to keep coverage other than converting to a permanent policy, making the conversion privilege invaluable.
Analyzing the quality of the conversion privilege involves looking primarily at two features: (1) how long the option is available and (2) what policy can the term insurance be converted to.
The period of time that conversion is available is sometimes expressed as a maximum age, like 65, for example, or, as a specific number of years from issue. These provisions vary from company to company and depend on issue age and length of time of the underlying term premium guarantee period. In any event, the longer the conversion period, the better, as it gives the policy owner the most flexibility for the longest amount of time.
The policy that is available for conversion can also make a huge difference. Generally, there are two different types of conversion provisions found in term policies: (1) convertible to almost any permanent product the company offers at the time of conversion or (2) convertible to a specific product that they make available at the time of conversion.
Insurance companies, knowing that insureds who exercise term conversions typically have some health impairments, realize there is a mortality cost when a term conversion is exercised. Therefore, a growing number of companies are issuing contracts with the second type of provision, which is less favorable to the policy owner. When they explore the cost to convert their term insurance, they are often shocked at the cost of the only policy that is available to them.
Insureds with term policies that can be converted to most any permanent policy that the company offers at the time of conversion are usually in a substantially better position. Term policies with this provision may be a little more expensive at issue, but the cost difference may be small for what may be significantly better options in the future. The cheapest price up front could be the costliest down the road.
How does this relate to life settlements? Convertible term policies that can be converted to well-priced policies from well-rated companies make great life settlement prospects. However, when the only available conversion option is an expensive policy, the likelihood of finding value on the secondary market decreases substantially.
For non-convertible term, or term insurance whose conversion period has expired, there is almost never any value as a life settlement. So, it is critical to make your clients aware of the expiration date, to preserve the value of the conversion option.
Convertible term policies also have a sometimes-overlooked feature: the policyowner can keep part, convert part, or sell part. This can be very important as needs and finances change over time. Knowledge of the conversion feature could make a major financial difference in the lives of your clients.
While term insurance policies may appear nearly equal, to paraphrase George Orwell, some term insurance is more equal than others.
As situations come up, be sure to give us a call. As we always say, “it can’t hurt to try – it can only hurt not to!” |
