Conversion Privilege: Understanding Your Life Insurance Options

A conversion privilege is a feature of some term life insurance policies that allows the policyholder to convert to a whole life policy before the original policy expires, without undergoing a new medical exam. This can be particularly useful for those who develop health issues, as they can maintain coverage without the need to apply for a new policy, which may be denied due to their present health. It is also beneficial for those who want lifelong coverage, as term life insurance policies are temporary and expire after a set number of years.

Conversion privilege defined

A conversion privilege, also known as a conversion option, is a feature of some term life insurance policies that allows the policyholder to convert their term life insurance policy into a permanent life insurance policy. This means that the policyholder can extend their life insurance coverage beyond the original term, which is usually 10 to 30 years. Instead of letting their term policy expire, they can exchange it for a permanent policy without needing a new medical exam. After switching to a permanent policy, the policyholder will have a death benefit that lasts their entire life as long as premiums are paid and the contract retains value.

The conversion process is usually simple. Policyholders place a request with their life insurance company to convert a portion or all of their term life insurance policy into a permanent life insurance policy. By doing so, they can skip the underwriting process and typically receive coverage within a few days. The new policy's premium payments will likely be higher than those of the original term policy.

The conversion privilege is particularly valuable for policyholders who have experienced a change in health, as it allows them to maintain coverage even if they suffer health problems near the end of the term. Without this privilege, they might have to apply for a new policy, which could be denied or priced higher due to their current health status.

It is important to note that conversion privileges may have expiration dates, and these dates can vary. Therefore, policyholders should carefully review their policy documents or contact their insurance company to understand the specific terms and limitations of their conversion privilege.

In the context of employer-provided group life insurance, a conversion privilege allows employees or former employees to convert their group coverage into an individual policy. This guarantees continued coverage regardless of their health status and guarantees premium payments for a specified number of years.

Types of life insurance conversions

There are several types of life insurance conversions available, depending on your needs and circumstances. Here are some common types:

• Term to Permanent Life Insurance: Term life insurance provides coverage for a specific period, known as the "term", and then expires. If you want to renew your coverage after the term ends, you may have to pay higher premiums due to increased age and risk of death within the policy term. A term life insurance policy with a conversion privilege allows you to convert it into a permanent life insurance policy without undergoing a medical exam. This option is valuable if your health deteriorates towards the end of the term, as it ensures continued coverage. Permanent life insurance, also known as whole life or universal insurance, is more expensive but provides lifelong coverage and can build cash value over time.
• Group to Individual Life Insurance: This type of conversion involves employees or former employees converting their group life insurance coverage provided by their employer into an individual policy. The conversion privilege guarantees continued coverage regardless of the policyholder's health status and locks in premium payments for a specified period.
• Partial Term Conversion: Instead of converting the entire term policy, you can choose to convert only a portion of it into a permanent policy. This results in having two separate policies: the remaining term policy and the new permanent policy. The premium for the remaining term policy decreases as the face amount is reduced.
• Conversion to Different Types of Permanent Policies: When converting from a term to a permanent policy, you may have the option to choose between different types of permanent life insurance, such as whole life or universal life insurance. Whole life insurance has a cash value account that accumulates interest, while universal life insurance offers more flexibility in terms of premiums and death benefits. The availability of conversion options and the specific permanent policies offered depend on the insurance company and the terms of your original policy.
• Conversion to Address Specific Needs: A term-to-permanent conversion may be beneficial if you want to leave an inheritance for your heirs, ensure financial security for a surviving spouse, provide for children or grandchildren, or cover final expenses and emergency costs. It can also be advantageous if you experience a serious change in health that might otherwise make it difficult to obtain a new policy.

Requirements for converting a life insurance policy

A conversion privilege in life insurance is a policyholder's right to convert a life insurance policy from one type to another without submitting to a medical exam or completing a new application. This allows the policyholder to maintain coverage even if they suffer health problems.

To convert a life insurance policy, the following requirements must be met:

Adhere to the terms of the provision in the policy

The policyholder must carefully review and comply with the requirements set forth in the conversion privilege provision of their policy. This includes submitting any necessary documents, adhering to the specified timeline, and meeting the due date. The requirements can vary among policies, so it is important to refer to the specific terms of the individual policy.

Notify the insurer within the specified time frame

In the case of group life insurance, employees or former employees intending to convert their coverage to an individual policy must notify the life insurance company within a certain time frame, typically 31 days from the termination of employment. Failing to do so may result in the need to go through a new approval process or medical examination.

Check the term conversion period

It is important to review the term conversion period specified in the policy, as this outlines the time frame during which conversion is allowed. Some policies allow conversion at any point during the term, while others limit the conversion period to a certain number of years or until a specific age. Policyholders should be mindful of this deadline to ensure they can make the conversion before the period expires.

Contact the insurance company

The policyholder should get in touch with their insurance company to initiate the conversion process. This involves requesting information about available permanent life insurance products, deciding on the amount of coverage to be converted, and completing the necessary application forms.

Complete the conversion application

The policyholder will need to fill out a conversion application form provided by the insurance company. This typically involves providing basic information and may include a questionnaire. Once the application is submitted, the new permanent policy is usually issued within a few days.

Employer obligations regarding life insurance conversions

Federal ERISA law governs employer-provided group life insurance coverage, whether entirely subsidised by the employer or paid in part by the employee. Under ERISA, an employer must provide covered employees with a copy of the policy itself and inform them of their right to purchase accidental death and dismemberment coverage (AD&D coverage) as a rider.

An employer has a duty to inform a covered employee of their right to continue coverage should they leave employment, and how to do so, in writing. They must also inform them of their right to apply for a waiver of the life insurance premium for disability, should they become disabled.

If any aspect of life insurance coverage changes, the employer must provide notice of that change in writing to all covered employees.

If an employee's life insurance coverage ends due to separation, resignation, retirement, death, or the end of 12 months in non-pay status, the employer must notify the employee of their right to convert to an individual insurance policy.

When it comes to employer-offered life insurance, or group life insurance, the option to convert is less common. It is usually referred to as a portability option, and switching from group to private insurance often requires underwriting.

Pros and cons of converting term life insurance to permanent life insurance

A conversion privilege in life insurance is a policyholder's right to convert a life insurance policy from one type to another without a medical exam or a new application. Permanent life insurance, also called whole life or universal insurance, is appealing because it builds cash value in addition to providing coverage. However, the price of permanent insurance is higher than term insurance.

Pros

• Permanent life insurance provides coverage for life, whereas term life insurance only provides coverage for a fixed period.
• Permanent life insurance guarantees a death benefit to beneficiaries, regardless of when the policyholder dies.
• Permanent life insurance can be used to accumulate cash value, which can help meet retirement goals or other long-term financial goals.
• Permanent life insurance offers tax advantages, such as tax-deferred growth and tax-free access to cash value.
• Permanent life insurance can provide financial security to a surviving spouse or leave a financial legacy for children or grandchildren.
• Permanent life insurance can help with estate planning, especially if the policyholder has more money and property than expected and wants to reduce estate taxes for their heirs.
• Permanent life insurance can be used to fund a trust for a lifelong financial dependent, such as a child with special needs.
• Converting to permanent life insurance can be done without a medical exam or answering health questions, making it a good option for those with health issues.
• Converting to permanent life insurance can be a simple process, and the policyholder can often skip the underwriting process.

Cons

• Permanent life insurance typically costs more than term life insurance, with premiums that are significantly higher.
• Term life insurance may be sufficient for those who only want coverage during the years their family is most financially vulnerable.
• Permanent life insurance may not be affordable for those on a tight budget, as the premiums are higher.
• Permanent life insurance may not be necessary if the policyholder's resources (assets and savings) are sufficient to cover their family's needs in the event of their death.
• Permanent life insurance may not be the best option for those with stable income who can keep up with the higher premium payments of a permanent policy.
• Converting only a portion of a term policy to permanent coverage may not provide sufficient death benefits.
• The conversion privilege in a term life insurance policy may have an expiration date, after which the policyholder will have to purchase a new policy.

Frequently asked questions