The Convertible Term Dilemma at Age 58
Diane, age 58, bought a 20-year level term policy 14 years ago with a $500,000 death benefit and a renewable-and-convertible rider. Her term premium is $640 annually. She has just been diagnosed with Type 2 diabetes and elevated blood pressure, and her agent tells her the term policy will expire in 6 years. Diane wants coverage to age 90 and asks whether she should (a) let the term run out, (b) exercise the conversion privilege now, or (c) renew the term for another term period. Her budget is tight: she can afford no more than about $4,200 per year in premium. The convertible permanent product offered by the insurer is a universal life policy with a current cost of insurance based on her original risk class, but the insurer requires evidence of insurability for any conversion after the policy's 10th anniversary under its current administrative practice.
1. Identify the contractual issue raised by the insurer's demand for evidence of insurability and explain how Diane should respond.
Read the worked answer
A conversion privilege is a contractual right, and the insurer cannot impose underwriting that the contract does not authorize. Diane should pull the original policy and rider and read the conversion provision word for word. If the rider permits conversion without evidence of insurability up to a stated age or policy anniversary, the insurer's "current administrative practice" is irrelevant - the policy controls, and a demand for evidence of insurability is a breach of the contract. She should submit the conversion election in writing before any deadline, cite the specific policy provision, and keep proof of the mailing date. If the provision instead limits the no-evidence window (for example, to the first 10 years or to age 60), the insurer may be within its rights, and Diane must decide quickly. Either way, the lesson is that conversion terms are frozen at issue and cannot be changed by later underwriting practice.
2. Compare the three options against Diane's health, budget, and coverage horizon, and recommend a course of action.
Read the worked answer
Option (a), letting the term lapse, fails because her diabetes and hypertension make new underwritten coverage expensive or unavailable, and she would be uninsured from age 64 onward. Option (c), renewing the term, preserves coverage but only for another limited term and at an increased renewal premium; it also does nothing about coverage to age 90. Option (b), converting now, locks in her original risk class and guarantees permanent coverage regardless of her health decline. The constraint is cost: a $500,000 universal life conversion at her age may exceed $4,200 per year. The practical answer is a partial conversion - convert the amount she can fund within budget (for example, $250,000) and keep the remaining term coverage in force until it expires. She should confirm the minimum and maximum conversion amounts, whether conversion is allowed on a partial basis, and whether the UL has a no-lapse guarantee so the policy does not depend on illustrated interest crediting.