The Term Conversion Dilemma
Maria, age 45, owns a 20-year level term policy with a $500,000 death benefit, purchased 12 years ago. The policy includes a convertible rider allowing conversion to any permanent policy offered by the insurer, without evidence of insurability, until the policy anniversary nearest age 65. Maria was recently diagnosed with type 2 diabetes and hypertension. She is considering converting to a whole life policy now because she wants coverage beyond the term period. The annual premium for the whole life policy would be $8,500, while her current term premium is $1,200. Maria has $50,000 in savings and earns $90,000 annually. She is worried about affordability but also fears being uninsurable in the future.
1. Should Maria convert her term policy now? Explain the key factors she must consider.
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Maria should strongly consider converting now because her health changes (diabetes and hypertension) would likely make her uninsurable or rated in the traditional market. The convertible rider guarantees her the right to convert without evidence of insurability, which is a valuable option. However, the premium increase from $1,200 to $8,500 is significant-about 9.4% of her income. She must assess whether she can sustain this premium long-term. Alternatives include converting only a portion (e.g., $250,000) to reduce cost, or converting to a less expensive permanent policy if available. She should also consider her need for lifelong coverage: if she has dependents or estate planning needs, permanent coverage is appropriate. Given her health, locking in coverage now is prudent, but she should ensure the premium fits her budget to avoid lapse.
2. What are the consequences if Maria waits until after age 65 to convert?
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If Maria waits until after the policy anniversary nearest age 65, the conversion privilege expires. She would then need to purchase a new policy through underwriting, which would likely be declined or rated due to her diabetes and hypertension. She would lose the guaranteed insurability and may be left without coverage after the term ends. Additionally, the cost of any new coverage would be based on her age at that time (65+), resulting in higher premiums. Therefore, waiting could leave her uninsured or with unaffordable options.