Term insurance can be an efficient way to protect your clients’ incomes during their working years. The cost of a term policy is far lower than that of a permanent policy, all else being equal, which allows clients to more easily afford the appropriate levels of protection.

Part of the reason term insurance can be obtained at a lower cost than a permanent policy is because a term policy is designed to provide a temporary duration of protection for a temporary need. If a client plans to retire between ages 65 and 70, a term policy with a level premium extending to age 70 could be an appropriate solution to provide a replacement to the client’s income in the event of death. But what happens when your clients find themselves at the end of their level term duration and ready to retire?

Retirement is a life event that unveils a whole new set of needs and concerns for which life insurance can often be a valuable asset. In most cases, if a client’s term policy lapses, that client would need to go through a health evaluation involving blood work, urinalysis, and possibly a variety of additional health qualification tests in order to be eligible for a new policy.

At retirement age, these tests may uncover health conditions that were not present when the client’s term policy was purchased years prior. The underwriting rating could end up being less favorable, or in a worst case scenario, the client may no longer be insurable.

See also: What if grandma’s uninsurable?

Fortunately, many term products offer a convertibility provision. This allows the policy owner to convert the term policy, or a portion thereof, to a permanent policy at the same health rating without having to go through any health qualification tests or underwriting. This can be a tremendously valuable feature for clients who would like to extend their life insurance coverage into their retirement.

But not all term policies are created equal.

Some life insurance companies offer term products that are only convertible for a specified duration, such as five or 10 years. Other products may offer convertibility to a specified age or for the duration of the level term period. Also, some term products can only convert to a specific permanent product or limited choices, while other products have more flexibility to choose the permanent product to which to convert. 

Even if your client has maintained favorable health, age is a primary factor in the cost of a life insurance policy. Since life insurance is an actuarial product, the older your client gets, the more a policy will cost. This applies to term conversions or newly underwritten policies.

As our clients with term insurance approach the end of their policies and the beginning of their retirement, we need to help them shift their focus to the permanent needs they will be facing throughout retirement and encourage them to plan ahead. Converting an appropriate amount ofterm insurance as early as possible can effectively “lock in” a more cost-effective premium in retirement.

 

For more from Adam Sherman and Timothy Hall, see:

Leveraging qualified assets with life insurance

Does your client still need that irrevocable life insurance trust?

The future of life insurance taxation