The recession is bringing attention to an often-ignored policy feature in level term life policies–the conversion option.
Conversion provisions typically allow level term (LT) insureds to “convert” (shift into) a new permanent life policy within a specified number of policy years. The new permanent policy is priced for the client’s “attained” (current) age, but the insured doesn’t have to submit new evidence of insurability.
Many agents say the tough economy is spurring them to sell more LT policies than permanent. That’s often because the LT cost is much lower than that for the permanent plans (such as whole life and universal life with secondary guarantees) that would better suit the client’s situation.
But agents also say they want the LTs for such clients to have “good” conversion options so that, when the client’s finances are more stable, the person can convert some or all of the LT into a permanent plan without new underwriting.
The problem is, conversion options have become more restrictive than, say, 10 years ago, so finding those “good” conversion options is not always a slam-dunk. Some agents aren’t even sure what a “good” conversion option is anymore.
Agents are also befuddled by another problem, which occurs at the end of the conversion period, not the beginning.
Simply put, many insurers have stopped sending out timely notices to insureds and their advisors stating that the conversion option will soon expire, says Lynda A. Melone, president of Insurance Solutions, a brokerage general agency in Tulsa, Okla.
“In the mid- to late-1990s, we’d see those notices all the time,” she says. “Now, agents don’t get the notices–not even at the end of, say, a 10-year term when the level premium guarantee period ends.”
Most companies don’t even send notices to the policy owners, Melone adds. And, even if notices are sent, “they often arrive too late” to take action.
Zack Taber, president, Taber Brokerage, LLC, Oklahoma City, Okla., concurs. “The agent rarely gets notified, so the case often falls through the cracks.”
Some companies do notify the customer, he allows, but on a short timeline. “Rarely do we get the opportunity to convert within 90 days,” he says, “and we are lucky if the notice arrives within 30 days.”
What typically happens, he says, is that the client receives a letter from the insurance company saying that the conversion period will expire within 30 days. The client doesn’t understand and so sets the letter aside. Then, five days before the expiration, the client picks up the letter and calls the agent to learn more. “But often five days is not enough time” to do the educating and related work, says Taber.
Clients can always keep their LT policy, Melone points out. However, once the LT period ends–after, say, 10, 15 or 20 years–the premiums start to rise every year based on annually increasing term rates.
The ART rates are very expensive, she says, and policyholders often drop the coverage rather than pay those premiums.
That puts the customers who still need life insurance at risk, she says. In addition, it makes it so that “the agents have to keep selling to get new customers.”
Buying new life insurance is an option, she concedes, but not for clients who have developed health issues that make them uninsurable or subject to high table ratings.
That anyone is talking about conversion options at all is one of the many surprising twists to life sales in the Great Recession.
Before the downturn, virtually no one asked about the features, says Melone. “Now, probably 90% of all term insurance requests we receive from agents include statements such as ‘must be convertible.’”
But to get the best option, agents have to get up to speed on today’s conversion option climate, say experts.
Conversion provisions vary quite a bit among products and insurers and so do the charges for the feature, explains Richard L. Akins, a financial planner with LPL Financial Services, Portland, Ore.
Sometimes, if the client is healthy, it could be cheaper for the client to purchase a new individual LT than to convert, he says.
Ideally, a good option would convert with no new underwriting for the full guaranteed premium period of the LT policy, regardless of the policy owner’s age, points out Taber.
In addition, the ideal option would have no restrictions on the policy to which the owner can convert, he says.
“It would also be nice to have conversion credits,” Taber says. These typically reduce the premium on the new permanent policy by a factor related to the premium the client has already paid on the old LT policy.