Convertible term – a flexible solution for current times?

05 June, 2023

Protection Taxation and trust

There is an option available with some providers’ term insurance policies that many clients are not aware of, or advisers have forgotten about, namely the conversion option. It could be the single best and most flexible method available to overcome the problem of enabling the client to continue their cover beyond the term of their policy, without further underwriting.

Background

Term insurance protects clients for a set period and pays out if they die or are diagnosed with a terminal illness, within the term. However, most people survive and find themselves with no cover, at a time when their circumstances have changed and are at an age when they are less likely to get cover at standard rates. Applying for a whole-of-life (WOL) policy at that point, means the premium will be based on their current age and health, which may have changed considerably! This is where convertible term can be invaluable.

Convertible term (CT)

The ‘conversion option’ has been around for many years, but is often overlooked, because it costs a little bit extra (at a time when clients are often looking for the cheapest cover) and there are only two providers who still offer this option.

The option is added at the outset of the application, on a single or joint life first death (JLFD) basis, with level or increasing life cover only and allows the client to choose to convert all, or part, of their sum assured to a WOL policy with the same provider at any time (or multiple times) before the end of the policy term, without any further medical questions or underwriting.

If the client has a JLFD term policy, when they convert to WOL, they can choose to have their cover on one or both lives assured, and whether they want the policy to pay out on a first or second death basis (subject to a maximum WOL age at point of conversion). For example, a client protecting a buy-to-let mortgage on a JLFD basis, might convert on a second death (JLSD) basis in order to meet a future IHT liability.

Health

The biggest advantage is that it removes health conditions as a factor (or barrier!) in continuing the client’s life cover. This is particularly valuable should a client’s health decline after taking out the term policy e.g. a heart condition could be a barrier to getting affordable life cover once the term policy expires, but if they have and use the conversion option, they’ll be able to maintain cover irrespective of their health. Effectively they are protecting their health rating when they took out their term policy – which is generally when you are young and healthy – which turns their ‘temporary’ term policy, into a ‘permanent’ WOL policy, by guaranteeing their future insurability.

Value-for-money

Though getting life cover at the lowest possible premium is often the driving force for most clients, you should spend time explaining the flexibility and insurability this provides them in the future. As this option is an enhanced client benefit, the premiums will be slightly higher (c.20%), but it’s a relatively inexpensive way to ensure clients can maintain life cover after their term policy expires. It can also be used as an alternative to higher WOL premiums for IHT planning, especially during the current climate, and may be the difference between them affording/having cover now and not. Here is an indication of comparative monthly premiums:

Age	Level Term cost	CT cost	WOL cost
30	£19.70pm	£23.82pm	£160.74pm
40	£32.60pm	£39.82pm	£213.64pm
50	£70.12pm	£86.34pm	£275.54pm

Zurich quotes 05/05/2023, £200,000 cover, terms to age 70, joint life first death, non-smokers.

On full conversion to WOL at age 65 on a JLSD basis, would (on current rates) cost £296.98pm (Zurich quote 05/05/2023). Whilst significantly more, the client may be in a better financial position to afford it and may be considerably less than the premium based on their actual health.

Client conversations should emphasize the peace of mind and reassurance this provides them and their family, together with the flexibility and guaranteed insurability it provides in the future. Inevitably though, it will turn to cost and one way of making the new premium more palatable, could be to demonstrate the saving they are making between a WOL and CT policy, or the value the sum assured under the policy is adding over and above the total premiums being paid – the Zurich whole of life calculator can demonstrate this.

Control and flexibility

Whilst the use of the option within the term, provides control and flexibility – as long as they/you remember they have it – the fact you can phase the conversion at different ages and for different sum assureds (up to the original sum assured under the term policy), can provide added flexibility as clients circumstances change, and make the premium increase more acceptable. For example, if the 40-year old above, decided to convert £50k every 5 years from age 50 on a JLSD basis, the overall cost would phase as follows:

Age	CT sum assured	CT cost	WOL sum assured (total)*	WOL cost (total)*	Overall cost (CT + WOL)
40	£200k	£39.82pm	-	-	£39.82pm
50	£150k	£30.49pm	£50k	£50.54pm	£81.03pm
55	£100k	£21.16pm	£50k (£100k)	£57.80pm (£108.34pm)	£129.50pm
60	£50K	£11.83pm	£50k (£150k)	£65.62pm (£173.96pm)	£185.79pm
65	-	-	£50k (£200k)	£78.66pm (£252.62pm)	£252.62pm
			£200k	£252.62pm

Zurich quotes 05/05/2023, non-smokers, joint life second death, £50,000 WOL. * each conversion is a separate WOL policy.

The total phased cost of £252.62pm, is 15% lower than the full conversion cost at age 65 (£296.98pm as above), which might be more digestible. And every time a client converts to a WOL policy, you will earn adviser income.

This phased approach can work well for clients with an IHT liability, where they intend to proactively reduce or eliminate their IHT liability, as it is more affordable than a WOL policy and flexible enough to allow them to only convert what they need. One example could be buy-to-let landlords that need to cover interest-only mortgages in the early years and IHT liabilities in the later years, but whose plans (and liabilities) may change e.g. if they decide to sell or gift properties.

All protection policies should be written in trust to avoid probate and the sum assured going back into the IHT-able estate! Any (WOL) policies issued as a result of the option being exercised, will be subject to the same trust provisions, so consideration needs to be given to applying a trust where you may later wish to convert to JLSD.

If a client’s circumstances change and they no longer need or can afford the option, it can simply be removed to reduce premiums (but cannot be re-added).

Opportunities

There are numerous client scenarios where converting from CT to WOL could be used:

family cover, to replacement life cover in retirement / meeting funeral costs
life cover in retirement, to funding for a shortfall in spouses’ pension or LTC costs
buy-to-let landlord interest-only mortgage cover, to paying an IHT liability
life cover in retirement, to paying off equity release or lifetime/RIO mortgages

The key opportunity at present, where cost maybe an issue to clients, is using CT as an alternative to higher WOL premiums. So, maybe always offering a CT quote, gives you and the client a fallback option – the client gets the cover they need at a more affordable cost and you get the business.

Summary

I believe that CT is a contract for the current climate, offering clients the best of both worlds – as it future-proofs a low-cost temporary term plan, and offers a cost-effective alternative to higher WOL premiums – together with guaranteed insurability in the future.

As an industry, not only must we support clients through the current difficult times, but as an adviser, you must also continue to look forward for clients, by helping them and their families plan for the future. Fully exploring and discussing the conversion option can help.

You can download our conversion option sales aid here.

Andy Woollon is a Technical Protection Specialist & Presenter at Zurich.