Conversion Privilege:Overview and Examples in Insurance

What Is Conversion Privilege?

Conversion privilege is an insurance policy in which the insurer is required to renew or update the policy regardless of the insured's health. An insurance policy with this type of provision allows the insured to switch to a different type of policy without submitting to a physical examination.

Key Takeaways

  • An insurance policy with a conversion privilege allows the insured to switch to another policy without submitting to a physical examination.
  • A conversion privilege guarantees coverage and set premium payments for a certain number of years regardless of the insured's health status.
  • A conversion privilege allows an employee under a group plan to convert their plan to an individual life insurance policy.

Understanding Conversion Privilege

A conversion privilege also guarantees coverage and set premium payments for a certain number of years regardless of the health status of the insured. The conversion privilege provision allows an employee that participates in a group plan to convert their group life insurance policy into an individual life insurance policy with little hassle, without having to go through another approval process or a medical exam. The life insurance company will extend coverage based on the fact that they were already approved as part of the group life insurance plan. 

In some situations, an individual can continue to receive a group discount even though they're no longer part of the group. To qualify for this provision, the insured needs to notify the life insurance company within 31 days of termination of employment with the group policyholder. If someone waits until after 31 days, they will have to go through a new approval process to get an individual life insurance policy. The process might entail a new medical exam, even if you work with the same company.

A conversion privilege helps workers who leave their job for a new job or self-employment by allowing them the option to obtain permanent life insurance.

Conversion Privilege and Term Life Policies

Term life insurance policies usually offer the conversion privilege option. Term life offers life insurance coverage for a specific period or number of years along with a death benefit. At the end of the term, the policy expires or can be renewed for another term. Since term life has an expiration to it, it typically comes with a lower premium for the policyholder. However, when the term is renewed, it's likely the premium for the new term policy would be higher than the original policy. Conversely, permanent life insurance is more expensive than term insurance since it provides coverage for the person's entire life.

A conversion privilege within a term life policy allows a policyholder to convert a term policy to a permanent policy that will provide insurance for the rest of someone's life. Therefore, even if diagnosed with a serious illness at the end of a term policy, a person will still be able to switch to a permanent policy without having to submit to another physical exam. By default, this option protects the insured from being denied insurance based on changes to their health.

Special Considerations

The conversion privilege will likely have an expiration date, meaning the policyholder has until then to convert to a permanent policy. Although the conversion guarantees coverage under a permanent policy regardless of the person's health, the premium can be increased based on their age at conversion. Just like any life insurance coverage, the premium goes up, the longer someone waits.

If health or life insurance needs have changed, it's best to review their conversion options. Term life insurance conversion will cost more than traditional medical underwriting. A prospective policyholder can save more money by converting when policy needs have changed rather than waiting until the very end of the term life insurance policy. Life insurance conversion requires no evidence of insurability and is guaranteed regardless of past or present health.

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