Policy Conversion Rights

Convert your term policy to a permanent asset

Here is a case study about one of the most valuable clauses in a term life insurance policy: the conversion right. This case study demonstrates significant strategic opportunity for forward-thinking clients and their advisors to convert a term life insurance policy to a permanent asset using their younger self’s health assessment.

Scenario

Many years ago, a healthy 45-year old-American client obtained $10m of 20-year term insurance at “best class” underwriting. The coverage was initially purchased to provide benefits for his surviving family. As he nears age 65, he has decided that he would prefer to continue living in the UK. Under the UK’s long-term residency rules, his worldwide wealth is exposed to the UK’s inheritance tax regime.

He prefers to consider lifetime insurance options to settle inheritance tax, rather than gifting assets with the hope of outliving the gift by 7 years. However, recent health concerns indicate he would now be evaluated at an underwriting class below average for his age.

The end of the term insurance conversion period is approaching. By exercising his conversion right, he is able to obtain the full $10m of permanent insurance using his existing policy’s optimal health rating.  This results in a 30% discount compared to applying for a new policy with current health underwriting.

A conversion right

A conversion right allows a client to turn an existing term life insurance policy into permanent cover with the same insurance company, guaranteed to pay at the end of the client’s life. No new medical exam and no further health questions are required and so the risk rating given at the time of the original policy is locked in, even if the client has suffered a change in health.

A conversion right preserves access to a client’s younger health and becomes increasingly valuable as they age and health changes occur.

Should a client become uninsurable, the value of the conversion right becomes even more significant, offering access to valuable insurance coverage completely unavailable on the current market.

Recommended action

In many situations, a conversion right represents a significant strategic opportunity. An older term policy can be left behind after a business sale or not actively considered as part of a wealth transfer planning strategy. In fact, most conversion rights expire worthless because their owners are unaware of their existence or value. As an insured ages, this option represents a highly valuable opportunity to bind coverage at below market rates.

As conversion rights vary, often expiring prior to the term policy itself, it is important that they be reviewed and monitored. Please let us know if we can be helpful in reviewing and developing a conversion strategy for your clients.

At Vie International, we are knowledgeable and qualified to give professional advice to policyowners of convertible life insurance policies.

Contact Vie International today to request a complimentary life insurance policy review.