As you move through different phases of life – buying a house, starting a family, opening a business, retirement – the amount and kind of life insurance you need also changes. When you're young and need a lot of coverage to replace a loss of income for your family, term life insurance makes sense. However, as you accumulate wealth and need coverage that will last for your lifetime, permanent life insurance is the only option. (For more, see: Understanding Different Types of Life Insurance.)
Term life insurance premiums are based on many factors, including your age, sex, health, driving record, medications, occupation and family history. Interest rates, the financials of the insurance company and state regulation can also affect premiums.
For younger ages, term coverage is inexpensive and the premium can be guaranteed not to change for up to 30 years. Once the guaranteed period ends, the policy still remains in force, but changes to a one-year renewable term. The premium is then based on your attained age and increases every year. (For more, see: How Age Affects Life Insurance Rates.)
If you remain healthy, you may be able to find new coverage at a reasonable cost. However, if you have health or other issues (such as traveling to foreign countries), you may be rated (which increases the premium), or even deemed uninsurable and stuck with the increasing annual renewable term policy.
One way to avoid this problem is by making sure the term policy you purchase includes a conversion rider. The rider guarantees you the right to convert an in-force term policy to a permanent policy without going through underwriting or proving insurability. The key features of the rider are: (a) you maintain the original health rating from the term policy upon conversion, even if you later have health issues or become uninsurable, and (b) you decide when and how much of the coverage to convert. The premium for the new permanent policy will be based on your age at the time of conversion. For example, say you purchase $1 million in a 20-year term policy at age 29. At age 39, you decide to convert $250,000, then convert another $250,000 at age 49, and allow the remaining $500,000 of coverage to lapse. The premium for each of the $250,000 policies would be different based on ages 39 and 49.
While the premium for a term policy with a conversion rider may cost more than a policy without the rider, it is definitely worth the small additional cost. To remain competitive, insurance companies are always changing the policies they offer, so it’s impossible to know exactly what coverage will be available in the future when you elect to convert. Thus, it makes sense to buy a term policy from a larger company that offers a range of permanent products.
The conversion rider should be part of the policy and allow you to convert the term coverage to any permanent policy the company offers with no restrictions. Examples of restrictions might include conversion by a certain age during the first 5-10 years that the term policy is in force or limit partial or multiple conversions.
When converting, if you wanted to add additional riders to the new policy (e.g., a long-term care rider), the insurance company may require you to go through underwriting again, and only offer you the new policy with additional riders at a lower health rating. You have the option of declining the offer and just converting the basic coverage.
The Bottom Line
Like it or not, we all need insurance at different times in our lives and your future needs are not always clear. Insurance companies continually review underwriting standards as new technology becomes available and you could suddenly go from a preferred to a sub-standard rating. There have already been debates about the use of genetic profiles in underwriting and insurance rating decisions. Locking in a block of coverage today can help ensure you don’t run into future problems.