Expiring Term Conversion Options = New Sales or Conversions
🛡️ Term Insurance Conversion Rights: An Unmitigated Benefit
Term life insurance is often purchased to provide coverage for a defined period, typically 10-30 years. Many term policies include the right to convert the temporary coverage to permanent life insurance—without new underwriting. As we’ll see, it’s the most important feature of a term life insurance policy.
💰 Conversion Option: What Policyowners Are Paying For
Several carriers offer a full spectrum of term products, from non-convertible term to term that can be converted up to age 70. The premium difference between the least and most flexible options varies from roughly 4%–8%, depending on the carrier.
- No conversion option = lowest premium
- Conversion right for the first 5 – 10 policy years = low premium
- Conversion privilege extends for the entire level premium period, or to age 65~70, whichever is sooner = slightly higher premium
The first option, non-convertible term, should rarely be considered, if ever, for the reasons we’ll examine below.
🔄 From “If” There Is a Claim to “When” There Is a Claim
Term insurance without conversion rights requires the lowest premium outlay. Such policies are priced given the extremely low probability of a claim, an “if.” No claim is expected.
For permanent insurance, the equation has changed from “if” there is a claim to “when.” Assuming the policyowner keeps the policy in force, a claim is certain. The insurer will have to pay the full death benefit.
This change in from “if” to “when” explains the cost difference between term products that will likely expire without a claim relative to those that give the policyholder the right to extend coverage until a death benefit is paid.
💡 Bobby Samuelson (The Life Product Review) notes that much of the cost of the conversion privilege is actually embedded in the pricing of permanent products. In effect, permanent policyowners subsidize the term conversion rights of a carrier’s block of convertible term business.
🧾 When Non-Convertible Term Makes Sense… Until It Doesn’t
Term insurance is often purchased with a clear, time-bound goal:
- 🏦 10-year term to cover an SBA loan
- 👦 20-year term to protect children during dependency
- 🏠 30-year term to cover a mortgage
At the time of purchase, conversion may seem unnecessary. But then…
⚠️ Life Throws Curve Balls
As life evolves, most of us gain a bit of extra weight, develop chronic conditions like diabetes, heart disease, or cancer. Some of us get injured in an accident. These life experiences can make it more difficult, or even impossible, to qualify for new life insurance coverage.
Term policyholders with conversion rights have the peace of mind that comes from the option to extend their coverage, with premiums based on the underwriting outcome of their original term policy. The policyowner who just had a heart attack or was diagnosed with cancer has the right to purchase permanent insurance at super preferred rates, if that is how their term policy was issues.
🛡️ Insurability Protection: A Small Price for Peace of Mind
The premium difference between non-convertible and convertible term is minimal. That small extra cost buys “insurability protection,” a safeguard against future uninsurability. Samuelson calls it “a steel.”
💸 Convertible Term = Potential Premium Recovery
Even if you don’t plan to keep coverage beyond the level term period, conversion rights can unlock value:
Example: A policyowner with a convertible term policy develops a serious illness. At some point they no longer need the coverage. They could let it lapse. They may also be able to sell it on the secondary market and recover some or all of the premiums paid.
💡 Note to Advisors: Institutional policy buyers require policies to stay in force until maturity. In other words, they prefer to buy permanent insurance. You may be able to convert the term policy before the policyowner sells it.
🔐 Conversion Rights = Flexibility for the Future
As should be clear by now, conversion privileges are the foundation for flexible planning. They allow policyowners to adapt coverage as life evolves, whether for family, business, or legacy needs.
🧭 Recurring Revenue Stream for Advisors
Most Advisors have a large block of term business. It’s a goldmine! Like AUM, it represents a recurring revenue stream. Here is how: Approximately 3–6 months before a policy’s term conversion window closes, take these steps:
- ✅ Reassess how much insurance is needed, and for how long
- 🔁 If term is still appropriate, apply for new term with several years of conversion rights
- ♾️ If the death benefit has become a “when” need, apply for permanent insurance
This strategy ensures the policyholder is not caught off guard by a surprise underwriting issue. And surprises happen in the real world…
🚨 A Real-World Cautionary Tale
We’re currently working with a term policyholder who delayed action. He applied for new coverage after his level term ended, years after the conversion right of his original term policy expired.
New labs required to apply for the new policy revealed a high PSA level. A subsequent workup with biopsy confirmed a Gleason 7 (advanced form of) prostate cancer.
Fortunately, he has the right to continue his existing term coverage for a few more years. However, the old policy now requires him to pay an exponentially increasing premium. Even after just two years post the level premium period, he is already paying more than 6x the premium he could have been paying, had he converted the original policy or at least replaced it with a new convertible term policy before he was found to have cancer.
🏆 Term Conversion Privileges: An Unmitigated Benefit
“The conversion privilege is arguably the most valuable part of the term insurance product.” —Bobby Samuelson, The Life Product Review (10/20/2020)
❓ Questions to Ask the Carrier
Sometimes it is not immediately obvious what rights an existing term policy offers. It’s best to reach out to the carrier and confirm conversion rights, along with other details.
- Is the policy still convertible? If yes…
- What is the final conversion date to convert to any permanent product?
- If applicable: What is the final date to convert to a conversion-only product?
- Which products are available for conversion?
📋 Action Steps: Audit Your Term Book Today
- Identify all term policies in your book of business
- Prioritize those with expired (or non-existent) conversion rights
- Schedule client meetings to go over options
- For convertible policies, set a task 3–6 months before the “any product” conversion window closes
- Consider replacing term policies that can only be converted to “conversion-only” permanent products. Your clients should hold polices that offer conversion rights to any permanent policy the carriers offers.
💬 Looking ahead: When you place term policies in going forward, code a task for a follow-up 3–6 months before the conversion right expires. That’s your opportunity to reconnect, reassess, and recommend conversion or replacement. Indirectly it’s also your opportunity to turn your term book of business into a recurring revenue stream.
If you’d like help evaluating term conversion options or provide your client with a comprehensive industry survey of term or permanent options, our case design consultants are ready to explore what’s possible. Let’s make sure your clients own policies that offer the opportunity to convert to quality permanent life insurance should their situation or needs change.
