As General Agent at MassMutual Michigan Metro, I’ve worked with hundreds of clients from various walks of life over 30 years in the business. Let me share a story about a young man who was just starting out in his career and getting married from about 25 years ago.
The client was in good health at the time and his future wife was working full-time. The couple planned to have children down the road, and decided to purchase convertible term life insurance. Within one year of marrying, this client was diagnosed with juvenile diabetes, which is now known as type I diabetes.
Fortunately, he’d obtained insurance when he was in the best class for eligibility, but this changed dramatically overnight. If he had tried to acquire insurance at that point, he couldn’t have gotten anywhere near the same rates. Because he purchased insurance early on, before a medical condition was diagnosed, he was able to convert it to a permanent policy and do it at the same best class rates.
Additionally, he purchased from a company that allowed the conversion to be any permanent product they had for sale. Fortunately, this client was looking towards the future and doing the best for the family he expected to build, and he made informed and wise decisions as a result.
For many young people just starting out, term insurance is a good option. Convertible term life insurance can be even more appealing because it provides greater flexibility, including the option of converting to permanent life insurance to meet changing life needs without the necessity of additional underwriting.
Term life insurance provides the insured with a benefit upon death within the stated timeframe of the contract, typically one, 10, 20, or 30 years. If during that time period, the insured experiences a need for permanent life insurance, the convertible term option allows him or her to change from the temporary plan to a permanent plan of equal or lesser face value if the change is made prior to the end of the convertible period. Perhaps the greatest benefit of convertible term insurance is the guarantee of insurability. Without the conversion option, if a client were to purchase a permanent life insurance policy at the end of the term, he or she would need to undergo medical underwriting. If that process reveals a health condition or the insured’s health has declined since the term policy ended, the person may be uninsurable or may be required to pay a substantially higher premium.
Another great feature that may be added to convertible term life insurance is the disability waiver of premium rider. In the event that the insured becomes totally disabled, the insurance company will waive future premiums as long as the policyowner is totally disabled, according to the terms of the policy. Some policies will additionally allow the policyowner to convert to permanent coverage while the insured is totally disabled and future premiums on the permanent policy will continue to be waived, according to the terms of the policy.
While term insurance is a great option for many people because of its low cost, it is a product that must be closely followed because the decision to convert to another type of life insurance must be made within the allowed conversion period, which is sometimes a shorter time frame than the level premium period.
The role of financial professionals like me is to counsel clients about their specific needs, whether it’s protecting their families, protecting a business – or protecting their own insurability. Financial professionals should explain to clients that their need for coverage will not end after 20 years and a term conversion schedule should be put in place. Learning about the benefits of whole life insurance up front can help clients understand the need to make decisions early on about converting their term insurance.
Term insurance, particularly convertible term insurance, can play a valuable role in a financial plan. The key is that it must be managed. Setting it on autopilot is not a wise option.