Life insurance, in general, isn’t something that should be commoditized, though term insurance is the product many consumers feel has the fewest downside ramifications when spread-sheeted and sold on a cost basis.
There have always been some differences in the products of various insurance carriers, but the biggest difference, in my opinion, involves conversion features and language. Carriers have different rules regarding conversion to a permanent policy down the road, including to what age a policy is convertible, how many years it’s convertible and to what product the term policy is convertible.
It’s this last issue that’s changed most significantly. Though more carriers are limiting the number of years the policy can be converted to less than the number of years of the level term contract, what the policy is convertible to is a very major issue.
Practice vs. Contract
Many insurance carriers have allowed conversion to any product they had available at the point of conversion, but there wasn’t a realization that this was by practice and not by contract. This became an issue when they changed practices and began falling back on contractual language. This means that many policy owners who thought they had the flexibility to convert to any available product were surprised when they requested conversion quotes and realized the rug had been pulled out from beneath them. I’ve seen multiple situations in which the products available for conversion have premiums double what would have otherwise been available.
Leaning on contract language also affects changes like splitting a policy and death benefit reductions; issues that seem unimportant until they’re important.
Explaining Reasoning to Clients
Following is an excerpt from an email I sent to a client a few days ago when she asked me to remind her of why I was recommending a certain term insurance product:
I’m happy to reiterate the reasons for my particular term insurance recommendation. You’re correct that it’s because of contractual conversion features. We can go with another carrier with modestly lower premium if this ends up not being important to you.
Conversion is the ability to convert to a permanent policy down the road. Even though there may not be a desire for that at this time, it provides a lot of flexibility regarding unknowns later.
Let’s say you’re getting toward the end of the level term period, and you decide you want insurance in force for longer. If you aren’t insurable, or insurable at a favorable rate in the market at that time, you may want to convert the term policy into a permanent policy that would last.
You would have to pay the higher premium of the permanent policy, but you could convert without going through underwriting, and you would get the new policy at the insurance class of the term policy, even if you had a heart attack, cancer and diabetes.
I’m recommending a product with the best conversion language. It lasts until a later age than most other insurance carriers, and it’s convertible for the full length of the term policy, up to age 75. Most importantly, it’s contractually allowed to be converted to any product the insurance carrier offers at that time. Many other insurance carriers are now limiting conversion to only a product they make available for conversion, and it costs about twice as much.
Finally, two individual term policies with this carrier on you and your wife are convertible to a single joint life policy in the event you want second-to-die coverage in the future for estate tax planning.
Lesson Learned
The lesson learned is that even lowly term insurance shouldn’t be viewed as a commodity. Seemingly unimportant aspects of contract language can result in unfavorable results and disappointment in the future if attention isn’t paid to details.
Bill Boersma is a CLU, AEP and LIC. More information can be found at www.OC-LIC.com, www.BillBoersmaOnLifeInsurance.info, www.XpertLifeInsAdvice.com, or email at [email protected] or call at 616-456-1000.