Because conversion clauses vary considerably, you should carefully read the conversion clause of any term life insurance policy you consider buying. A sample Life conversion clause read in part:
Conversion at End of Final Renewal Term – If all due premiums have been paid to the end of the final renewal term, you may then convert the policy, without evidence of insurability, to a new policy on the life of the insured. The new policy will be on the Whole Life plan in the same underwriting class as this policy …. The new policy must be for at least $10,000 but not more than the Face Amount of Insurance of this policy. The premium will be determined by the insured’s age on the date of conversion….
Other Conversion – At any time while your policy is in force with all due premiums paid, you may convert it without evidence of insurability to a new policy on the life of the insured. To do so, send us a written request and this policy.
The amount of life insurance provided by the new life insurance no medical exam policy may not be more than the Face Amount of Insurance of this policy. The date of the new policy may be either the date of this policy or the date of conversion. The new policy may be on any life or endowment plan (but not a term plan) in an amount which we regularly issue at the insured’s age on the date of the new life insurance no medical exam policy. . . . Premium rates’ will be those in effect on the date of the new policy. We will determine the amount of any other payment required by reason of the conversion.
This Life clause is relatively standard in its description of attained age conversion. Under this arrangement, the premium you pay if you convert is based on your age at the date of conversion.
There is, however, another kind of conversion, called original age conversion. With it, the premium you pay is based on your age at the issue date of your original term policy. You pay the company the money it would have received – as well as interest on that money – if you had elected the cash value insurance from the outset. In other words, you pay the difference between what the term premiums were (adjusted for any dividends) and what the cash value premiums would have been, as well as interest on that difference.
If you’re planning to convert your term life insurance policy to a cash value policy and you’re given a choice between original age and attained age conversion, you’ll have to do some figuring to see which basis is better for you. If you choose attained age, your annual premium will be higher, but you probably won’t have to make a large lump-sum payment to the company.
If you use an original age basis, your annual premium will be lower, but you’ll probably have to pay a large lump sum to convert the life insurance no medical exam policy. We suggest that you start by computing the amount of the lump sum you’ll have to pay. Because you most likely will have to withdraw the money from your savings account or from other investments, estimate how much interest on that money you’d be giving up each year in the future. Then, see how that lost interest compares with your annual premium savings from using an original age basis for conversion.
Original age conversion offers a possible advantage over attained age conversion in the event you want to buy a term life insurance policy now, but think it’s likely you’ll want to switch to a cash value policy later. An original age conversion clause allows you to lock in the premium-and-dividend structure of a cash value plan you find attractive. To get that advantage, you may even want to purchase your term policy from a company that charges a bit more than its competitors, if the cash value policies offered by that company look attractive to you.
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