Are Convertible Term Life Policies On their Way Out of the Life Insurance Industry?

fortune teller
Predicting the future of
convertible term life policies.

The life insurance industry has gone through a major transformation in the last 12 months.

Historically low interest rates and changes in accounting provisions governing insurance companies have put tremendous financial pressure on life insurance companies.

As a result, almost all life insurance companies have significantly raised prices on their permanent life insurance policies, such as term 100 life insurance, universal life level cost-of-insurance policies, and non-participating and participating whole life insurance. These policies have all gone up by 20 per cent to 30 per cent, and some companies have gone as far as removing these products from their lineup.

The next product that may be under pressure is the convertible term life insurance policy. Term insurance policies have done very well in general. Over the last decade, premiums have gone down by as much as 35 per cent, but the conversion provisions under these policies are starting to come under scrutiny. The conversion feature on a life insurance policy allows the insured to convert, without a medical examination, to a permanent life insurance policy — but the problem for the insurance companies is that these conversion privileges costing them a great deal.

People who convert their term life insurance policy into a permanent plan are the most unlikely to cause the policy to lapse. Even in the unlikely event that the policies do lapse, most of these policies are lapse-supported — which means the insurance company actually hopes that the insured will lapse policies at some point. The other variable involved, though, is that people who convert their term policies are often in poor health. Therefore the insurance company faces a much greater risk of paying out a claim on these policies in the short term. The insurance broker is also paid full commission on these policies.

When you combine these variables, it’s easy to see why insurance companies are analyzing the existing convertibility feature on term plans. Term plans are a great option for both the insurance advisor and the consumer, but they exert a financial strain on the profitability of insurance carriers in Canada.

So what changes might come down the line? One option insurance companies may turn to is non-convertible term life insurance policies, or non-convertible term life insurance policies, with a small paid-up feature at the end of the term. Another option is to offer a convertible term policy in which only part of the face amount is convertible.

With all of these changes looming and all of these product options on the table, the next 12 months should be an interesting time for the life insurance industry.

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  • LSM Insurance
    September 26, 2012 at 10:05 am

    Thanks for the note Lisa. Any future changes would not change your existing policy. What could impact things is the number and type of policies the existing coverage would be convertible to. Any example many companies have repriced or removed their Term 100 or Universal Life Term 100 policies. Therefore the convertibility option is the same but the options around the conversion are more limited.

  • Lisa
    September 26, 2012 at 7:18 am

    Would any changes impact the life insurance policies I already have. thks