The recession is bringing attention to an often-ignored policy feature in level term life policies--the conversion option.
Conversion provisions typically allow level term (LT) insureds to "convert" (shift into) a new permanent life policy within a specified number of policy years. The new permanent policy is priced for the client's "attained" (current) age, but the insured doesn't have to submit new evidence of insurability.
Many agents say the tough economy is spurring them to sell more LT policies than permanent. That's often because the LT cost is much lower than that for the permanent plans (such as whole life and universal life with secondary guarantees) that would better suit the client's situation.
But agents also say they want the LTs for such clients to have "good" conversion options so that, when the client's finances are more stable, the person can convert some or all of the LT into a permanent plan without new underwriting.
The problem is, conversion options have become more restrictive than, say, 10 years ago, so finding those "good" conversion options is not always a slam-dunk. Some agents aren't even sure what a "good" conversion option is anymore.
Agents are also befuddled by another problem, which occurs at the end of the conversion period, not the beginning.
Simply put, many insurers have stopped sending out timely notices to insureds and their advisors stating that the conversion option will soon expire, says Lynda A. Melone, president of Insurance Solutions, a brokerage general agency in Tulsa, Okla.
"In the mid- to late-1990s, we'd see those notices all the time," she says. "Now, agents don't get the notices--not even at the end of, say, a 10-year term when the level premium guarantee period ends."
Most companies don't even send notices to the policy owners, Melone adds. And, even if notices are sent, "they often arrive too late" to take action.
Zack Taber, president, Taber Brokerage, LLC, Oklahoma City, Okla., concurs. "The agent rarely gets notified, so the case often falls through the cracks."
Some companies do notify the customer, he allows, but on a short timeline. "Rarely do we get the opportunity to convert within 90 days," he says, "and we are lucky if the notice arrives within 30 days."
What typically happens, he says, is that the client receives a letter from the insurance company saying that the conversion period will expire within 30 days. The client doesn't understand and so sets the letter aside. Then, five days before the expiration, the client picks up the letter and calls the agent to learn more. "But often five days is not enough time" to do the educating and related work, says Taber.
Clients can always keep their LT policy, Melone points out. However, once the LT period ends--after, say, 10, 15 or 20 years--the premiums start to rise every year based on annually increasing term rates.
The ART rates are very expensive, she says, and policyholders often drop the coverage rather than pay those premiums.
That puts the customers who still need life insurance at risk, she says. In addition, it makes it so that "the agents have to keep selling to get new customers."
Buying new life insurance is an option, she concedes, but not for clients who have developed health issues that make them uninsurable or subject to high table ratings.
That anyone is talking about conversion options at all is one of the many surprising twists to life sales in the Great Recession.
Before the downturn, virtually no one asked about the features, says Melone. "Now, probably 90% of all term insurance requests we receive from agents include statements such as 'must be convertible.'"
But to get the best option, agents have to get up to speed on today's conversion option climate, say experts.
Conversion provisions vary quite a bit among products and insurers and so do the charges for the feature, explains Richard L. Akins, a financial planner with LPL Financial Services, Portland, Ore.
Sometimes, if the client is healthy, it could be cheaper for the client to purchase a new individual LT than to convert, he says.
Ideally, a good option would convert with no new underwriting for the full guaranteed premium period of the LT policy, regardless of the policy owner's age, points out Taber.
In addition, the ideal option would have no restrictions on the policy to which the owner can convert, he says.
"It would also be nice to have conversion credits," Taber says. These typically reduce the premium on the new permanent policy by a factor related to the premium the client has already paid on the old LT policy.
Realistically, however, agents are finding conversion features to be less rich.
The options have become more restrictive over the years as carriers have sought to control anti-selection, notes Al Lurty, senior vice president-business development for life insurance, ING US-Insurance, Malvern, Pa.
"Many LTs used to allow conversion up to the later of the level term period or age 75 or 80," he notes, "but some companies have now trimmed back the maximum conversion age to 70-75 or to a certain number of years from when the policy was issued."
At ING, Lurty says, the conversion period extends to the earlier of five years before the end of the LT period or age 70, and the policyholder can convert to a no-lapse guaranteed UL or an accumulation UL, with no restrictions.
Taber has noticed that one company will allow conversion beyond the LT period if the policy goes into ART rates.
Akins says some LTs still allow conversion to any permanent policy now sold by the company. But others restrict conversion to a particular policy, and the cost of that can be "staggering," he says.
Some carriers are offering a choice of converting during the first few policy years or, for a greater cost, converting during the full LT period, Akins adds. Clients with no health problems might be better off taking the shorter option, he says, but those with potential health issues might be better off with the full LT period conversion option. Faced with this choice, "the agent has to determine what risk the client wants to shift to the insurer and what to retain," he says.
Some LTs have no conversion feature at all, observes Akins. If an advisor has a case involving a young family with a life insurance need for 10-20 years, such LTs might be okay, he allows, since the client will likely not want to convert. "But the decision should depend on the needs of the client," he stresses.
ING's Lurty doesn't believe the no-conversion LTs sell well, however. "A couple of companies tried to promote LTs with no conversion features in the past," he recalls, "but they failed miserably."
Take away that feature "and you won't sell the product," he says. "It's like table stakes in poker--if you don't have it, you're not going to play."
Even so, according to LIMRA's last Persistency Report, only about 1% of term policies are converted to permanent insurance (2001 data).
That's about the same conversion rate that ING sees, says Lurty. However, the rate may be much higher among the agents who focus on customer needs and follow-up on conversion options, he says.
This makes for a confusing situation--the feature is in high demand right now, but few people actually exercise the option.
Here are some suggested workarounds for agents:
--Look closely at the conversion options before recommending a policy, advises Lurty. As for doing the conversions, "the agents have all the incentive to follow up on this with the client," he says.
--Do policy reviews, even if the policies are written by someone else, says Taber. "If you see a conversion option in the policy, educate on what it is and then follow up."
--Be diligent about monitoring the client's policies, especially near the end of the conversion period, says Melone.
--Keep following up with the client. "Many people are willing to pay a commission to have someone come out and sit with them and talk about their insurance needs," Melone points out, noting the discussion would include conversion.
Here are suggestions for companies, too:
--Do more policyholder education about conversion options, says Taber. A good time for this is when the insurer sends the annual statement to the client, he says.
--Send a copy of conversion expiration notices to the agent as well as the customer, says Melone.
Some insurers are on board with notifying both agents and customers. For instance, West Coast Life Insurance Company, a company of Protective Life, Birmingham, Ala., recently told its agents that annual statements for term and term-like policies will now include information about not only policy benefits and premium payments but also conversion and exchange provisions. The statements will be sent to both policy owners and their agents, the company says.
Protective already handles annual statements this way, says Eric Miller, vice president and national marketing director. "Now, the statements will be consistent between the companies."
"A lot of LT policies that were written in the 1990s are nearing expiration," sums up Taber, the BGA. For that reason alone, the life insurance industry will need to deal with conversion issues soon, he says.