What is a convertible insurance policy?

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December 2016
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I'll give you an example that is a composite of cases in my files.

Bob is 35 years old and needs life insurance for family protection. He wants to make sure his wife and kids are provided for if they tragically lose him. So he buys $2 million of a 20-year term, thinking that should be sufficient coverage until his youngest child is out of the house. He is young and healthy, so the premium is pretty low.

Now fast forward 15 years. He has a second mortgage, and two more kids. He realizes that he only has five years left on his premium guarantee, but certainly needs life insurance way past that point. But here's the kicker: he unfortunately had a heart attack last year, and a number of other serious medical complications. You wouldn't expect this in such a young guy, but these things happen. He wants to buy another term policy, but many carriers won't even touch him. The ones that are interested want to charge an arm and a leg.

Fortunately, his current term policy has a conversion privilege. He can switch to a permanent policy and lock in a guaranteed premium for the rest of his life. Best of all, he will not have to go through underwriting -  the completion of a simple application will suffice for an approval. He will get charged the rate for someone his current age, but it will be at the original rate class. If he was approved at preferred non-smoker rates for his term insurance, he will be converted to a permanent policy at the same rate class.

In this situation, the term conversion is a real coverage-saver. Bob would basically be out of luck in getting a new policy because of health problems he didn't foresee down the road. The moral of the story is this: you cannot take your insurability for granted. God willing you stay healthy, but there is no guarantee. Start thinking about locking into rates on a long-term basis. The conversion privilege can help you do that.

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