Do you have clients with convertible term contracts? Do you know when they expire?

Convertible term policies are a commonly misunderstood section of the life insurance market. Typically, these contracts were taken out to secure a client immediate protection at a time when their cash flow was limited. The policies run to a maximum age of 65, at which point they lapse with no value. During the term of the contract the life assured has the option to extend or ‘convert’ the cover to a longer-term length; usually ‘term to age 90’ or ‘whole of life’ – importantly, without further medical underwriting. This set up keeps the initial contract premiums low but gives clients the option to extend the contract when the premiums for longer term cover become affordable.

It is crucial to monitor these policies annually to ensure both that policy options are utilised effectively and that the expiry date on the term is not missed. Once a policy has lapsed, it cannot be reinstated nor the policy options utilised.

Why convert?

If a client is in good health, it is likely that long term cover could be secured for better rates by rebroking into the open market rather than converting through the existing insurer. However, where a client experiences medical issues whilst holding a convertible term policy, it will often be cheaper for them to activate the conversion option on the existing policy thereby securing themselves longer term cover without any further medical underwriting. To reiterate, when converting you do not have to tell the life office about any medical conditions you have experienced. You will however need to reconfirm your smoking status.

Why convert early?

In almost all cost benefit analysis exercises, the amount of money that can be saved in the long-run by converting/rebroking earlier rather than later is very significant. This is because insurance premiums are heavily driven by the age of the life assured. Therefore, securing longer term cover at a younger age will nearly always result in a hefty premium saving over the full term of the contract compared with converting/rebroking at an older age.

Additionally, if the intention is to rebroke rather than convert a policy, in order to access the best open market rates, then delaying the decision exposes the client to the risk of developing new medical issues in the intervening period. These issues may then make the client ineligible for a more affordable premium upon re-broking.

Additional benefits of converting

Some convertible term policies also have a valuable indexation increase option. Upon conversion, this option allows you to increase the sum assured on the policy in line with RPI increases since policy inception – again, without medical underwriting. This can provide access to a significantly higher sum assured without having to rebroke an entirely new policy. It is worth noting that premiums will also rise by slightly more than the increase to the sum assured.

How can John Lamb Hill Oldridge help?

We oversee a significant number of these policies, are technically proficient in their terms and conditions and can explain to advisers and clients alike how the policies can be made to best work for them.

We can demonstrate the cost-benefit analysis of these policies and monitor them for you so that you don’t miss any vital deadlines.

If you have clients with these policies and would like us to review them, we would be delighted to assist.

Please get in touch at [email protected] or 020 7633 2222.