The ongoing difficulties in the
macroeconomic picture in the US have renewed attention on a
long-overlooked feature in many term life policies – conversion
options.
Life insurance conversion options
allow level term policyholders to convert their term coverage to a
new, permanent whole life policy within a specified number of
policy years. The new permanent policy is priced for the client’s
current age, and the real advantage is that the policyholder does
not have to go through the process of submitting new evidence of
insurability.
Go deeper with GlobalData
Access deeper industry intelligence
Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.
The economic situation has more
agents selling term policies than whole life these days, so there
is a real opportunity for conversion options, because many of those
older Americans buying term would be better suited by a permanent
policy product.
The market for term products with a
conversion option has never been better, in fact, but the producers
over the past few years have created more restrictive conversion
options than in the past, making it harder than ever for agents to
find suitable options for their clients.
Only 1%
converted
US Tariffs are shifting - will you react or anticipate?
Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.
By GlobalDataAccording to financial services
organisation LIMRA’s
last Persistency Report, only about 1% of term
policies are converted to permanent insurance.
Clients can keep their term
policies, of course, but after the initial term ends, typically
between 10 and 20 years, the premiums start to rise every year
based on annually increasing term rates. That means most
policyholders will eventually drop the policies and disappear
altogether, with disastrous effects on insurers’ retention
rates.
Without timely notice of the onset
of a conversion option, a policyholder’s only choice is paying the
higher term rates or buying new life insurance, often an uphill
struggle for clients who have developed health issues that make
them uninsurable or subject to high-risk classifications.
Conversion provisions vary widely
among products and insurers, as do the charges for the options.
Sometimes, if the client is healthy, it could be cheaper for the
client to purchase a new individual term policy than to
convert.
An ideal option would convert with
no new underwriting for the full guaranteed premium period of the
long-term policy, regardless of the policy owner’s age, and has no
restrictions on the policy to which the owner can convert, but
those are nearly impossible to find in today’s insurance
marketplace.
Conversion credits, which reduce
the premium on the new permanent policy by a factor related to the
premium the client has already paid on the old long-term policy,
are also an attractive, if hard to find, feature once commonly
included in many conversion option packages.
Early conversion
option
A handful of carriers offer a
choice of converting during the first few policy years or
converting during the full long-term period for a bit higher cost,
and becoming more proactive in communicating the option to agents
and policyholders.
West Coast Life Insurance Company,
a unit of Protective Life, recently told its agents that annual
statements for term and term-like policies will now include
information about not only policy benefits and premium payments but
also conversion and exchange provisions. The statements will be
sent to both policy owners and their agents.
Protective also recently announced
the release of a new second-to-die term life insurance policy,
Protective Survivorship Term (PST).
The PST product is a second-to-die
term life insurance policy, insuring two lives under one policy,
with the death benefit payable to the designated beneficiary
following the surviving insured’s death. This product is primarily
designed for estate planning needs and also works well for wealth
preservation.
In addition, the product provides a
conversion option to a permanent insurance plan before the end of
the level premium period and in the event of divorce or changes in
legislation that nullify the advantages of Survivorship Term in
estate planning situations, there is a policy split option.
Term conversion could be lifted by
the same forces fueling the overall rediscovery of whole life
coverage. During the 2008-2009 recession, which significantly hurt
sales of both variable life and universal life products, Limra
found that whole life grew in 2008 and 2009 at nearly 10%.]
Whole life
advantage
Doubtless there will be a time in
the not-too-distant future when variable universal life will come
roaring back. The economic conditions now will permanently make
whole life that much more attractive for the foreseeable future,
though.
In the current environment, whole
life gains strength because the underlying assets an insurer holds
to back the product are largely long-term government bonds and
other safe income instruments whose rates are substantially higher
than today’s short-term rates.
Consultancy Ethical Edge produced a
study that advocated the use of whole life insurance as an asset
class inside a fixed-income portfolio, demonstrating the potential
power of conversion. In one example, a whole life policy is teamed
with the bond portion of the portfolio so the bonds’ income is used
to pay premiums on the whole life policy.
Assuming a constant 4% interest
rate, the study found that after 17 years, the value of the bonds
plus the cash value of the whole life policy would be the same as
the bonds’ value using the income to add to the bonds’
principal.
After that, the bonds’ value plus
the policy’s cash value grow faster. Moreover, the legacy value of
the bonds plus the death benefit of the insurance policy is much
greater on the first day and stays that way until the death of the
insured.
Not only does the portfolios rate
of return improve, but the policy also helps account for market
volatility. That is because the bond is subject to interest-rate
risk, while the whole life policy is an uncorrelated asset, the
guarantees of which are not subject to interest-rate risk.
The study also considered a
strategy of buying term insurance and investing the difference.
Such a strategy may outperform a participating whole life policy
over certain periods, depending upon the discipline and ability of
the insured to actually succeed in investing the difference.
But over the long term, a term client would need to achieve
nearly a 10% pre-tax annual return.
