What Is A Convertible Term Policy? | IBC Global, Inc

Okay, we are going to go through convertible term insurance here. We're going to go through how convertible term policies work, when they might be appropriate, and then really the limitations. This is the important factor to be aware of that a lot of times consumers and agents find out after the fact and that's where we have a situation of oh man, I wish I would have known that before I started. So how it works? Let's begin with that. Let's assume that I have a 20-year term insurance policy, $1,000,000 per year, I'm sorry $1,000,000 death benefit. Premium is $500 per year and we're going to assume I start this policy in 2020 and I am a healthy individual. In this specific example we are going to look at a 35-year-old male. Okay, now how a convertible term insurance policy works is if I purchase a $1,000,000 death benefit, we'll assume that it is 20 years, that policy is convertible for the 20-year period. Some policies require that we add a rider, often it's termed as an extended term conversion rider or a different name that really locks in the ability to be able to convert that term policy to whole life insurance for the entire 20-year period. Now a couple things here, is when I convert a policy really what it allows me to do is if I start at age 35 in 2020, I have a health rating, best class, is when I eventually convert that to whole life, my whole life policy will carry the same best class health rating that I received when I originally took that term insurance policy out. So another way to put it is that no medical underwriting is required with term conversions. It's a nice way to lock in my health. Another purpose for it is I may really be attracted to the idea of a high cash value life insurance policy. I want the ability to put in X amount of dollars but I'm just not there yet. I know money's coming in, maybe it's a pay raise, maybe it's a promotion, maybe it's an inheritance, but I'm not there yet. However, I want to lock in my insurability to be able to obtain a policy down the road. Can absolutely do that and a convertible term policy will fit that need. Now when it comes to the conversion feature, some things to be aware of. Assuming I have a $1,000,000 death benefit, let's say 5 years into it, I want to convert the full $1,000,000. No problem. Let's say I only want to convert $500,000. Meaning, I'm going to take out a $500,000 whole life insurance policy. That will be based off of my rating, best class, what I received when I took the term policy out. And then I would maintain the $500,000 term policy. And this was originally a 20-year term. I converted it 5 years after the fact, which means I have 15 years remaining on that. Now because it is $500,000 and no longer $1,000,000 it will be repriced with most companies and the price will likely kick down to about $250,000. It is still based off of my age when I took the term policy out, at age 35. So a lot of good things. Again, the key advantage is that I can convert over to whole life insurance, design a policy for high cash value life insurance, without having to go through underwriting again. Now the premiums I pay, so if I've got a $500 per year premium here, and I convert it 5 years after the fact, so at age 40, the premiums I paid, which would have been $2,500, those are gone. So that is rent you can call it. Now that is a cheap way to obtain life insurance to protect the need term. Life insurance definitely has a place but when I convert a policy with most companies and products I do not recapture the premiums I paid. A couple out there do offer that, they let you go back to the original age but it often has MEC problems whenever we've studied that. So let's go through some limitations here because this is important and it's kind of the, I didn't know that, which always pops up after the fact. And if we can be prepared for everything that can pop up, well that'll prevent any chance of buyer's remorse call it. So same situation, I've got that $1,000,000 policy. What happens with a convertible term policy is first, whenever I convert it to whole life it's typically company to company, it's got to be within the same insurance company. So if I take out a $1,000,000 term policy with company A, when I convert it 5, 10, 20 years down the road it has to be with company A. There are some programs out there that allow you to take a term policy and flip it over to a whole life with another carrier, typically within the first 3 to 5 years depending on companies and limitations. But that's a bit different than a convertible term. So here, limitations with a convertible term typically have to do with policy blending. Alright so blending, we talk about this frequently, has to do when we design a life insurance policy, my money can go where? I'm not going to go through all the details here. Premium or the PUA component. Now when we design a policy for maximum cash value from start to finish, you're frequently considering and utilizing a term insurance rider. A lot of times that is a fit, it's a cost-efficient way really to raise my MEC limit and keep my premium low because the premium eats up the bulk of your cash value in particular during the 1st year and sometimes the 1st and 2nd year, depends on the product. So typically if we go with a 10% premium and a 90% PUA, that's going to allow us to juice the cash value. So a lot of times one says, okay let me take out a term policy and then I want to convert it over to whole life with a maximum cash value policy minimum premium. Limitations will prevent us from doing that. And if you have not watched our policy design video and you want more information on the premium and PUA, how to structure it efficiently, I'd encourage you to view that. So with the limitations specifically here, when it comes to the premium component, all companies have different rules here. Let's use this one example here. If I want to convert 5 years into it and I have a $1,000,000 death benefit, the premium piece, how I should rephrase this, is the whole life death benefit must be at least 50% of the total death benefit. Meaning if I'm converting $1,000,000 and I'm blending a policy, I say get my premium as low as possible, we're going to have limitations here as the whole life portion will be $500,000 which will force a much higher base premium. Likely be closer to 25% for a 40-year-old male. Which will impact the cash value. Know this can be a bit complex because I'm just looking at a convertible term policy. The quick answer would be hey, you can buy a term policy today based off your health rating and then when you convert it, if it's 5 years down the road, 10 years down the road, whatever, it's based off your health rating now and you can design a policy for high cash value. That's true but if I am interested in getting the maximum cash value, maximum amount of money of my deposits in any situation, I want to be aware of what limitations exist so I don't figure something out after the fact that I wish I would have known when I first started. So let's look at an example. Hey guys, Steve Parisi here. If you enjoyed the content you just saw, please subscribe, like and hit the notification bell for future videos. If you'd like more information or to see some custom policies for yourself, feel free to call or email our offices at the contact information below. Have a great day.