Revisiting the insurance question

“You should be reviewing [your clients’ insurance coverage] on at least an annual basis to determine whether or not the coverage is still sufficient or if it’s now suddenly too much,” he says, “because people’s lives change.”

But because procrastination is part of human nature, many clients tend to hold off on taking action until the end of their policy term is quickly approaching. “Lots of people won’t do anything until they suddenly realize that there’s less than two or three years before they’re going to have this massive jump [in premiums], and they realize they still need the coverage,” Shumak says. “That’s usually when you get a phone call.”

Although some clients may find that life insurance coverage is no longer a priority when the term of their policy comes to an end, other clients still may have hefty mortgages, dependent children or longer-term estate planning needs that require continued insurance coverage. For those clients who still require coverage beyond the length of their original policy’s term, there are various options to consider, including renewing the policy, shopping around for a new one or converting some or all of the coverage to a permanent life insurance policy.

Your clients will have more flexibility in how they can proceed when they consider their options early in the term of their current policy. Within the first five years of a term policy, for example, some insurance carriers allow clients to convert their policy to a longer term without medical underwriting. In addition, for those clients who are interested in eventually converting their policy to permanent coverage, the earlier they take action, the more affordable their premiums will be.

If clients don’t take action prior to the end of their current policy’s term, that policy typically will renew automatically until expiration, which generally occurs at age 75 or 80. However, automatic renewal is an expensive proposition. Term insurance premiums tend to skyrocket once the original term ends, surging to as much as five times the original premium.

In the case of a male client who bought a $500,000, 10-year term policy at age 35, for example, the premiums would jump from approximately $28 per month in the first 10 years of the policy to $143 per month in the 11th year, according to David Baker, assistant vice president of insurance products, retail markets, at Toronto-based Manulife Financial Corp.

If your client is healthy and wants to maintain insurance coverage, he or she is far better off applying for a new policy and going through the medical underwriting process again, Baker says. “Anybody who is healthy is effectively going to do something,” Baker says. “They’re not going to renew unless they’re uninsurable, because it’s cost-prohibitive.”

For clients who opt to replace their term policy with a new one, however, it’s important to remind them that they’ll have to restart the two-year contestable period and suicide clause. “If they were to suddenly pass away six months after [getting the new policy], the insurance company they’re with is going to take a much closer look at the application and make sure that all the Ts were crossed and Is were dotted,” says Shumak. “That’s a risk.”

Clients who have developed health problems since buying their original policy may not have the luxury of shopping around for cheaper coverage. If clients are no longer eligible for a standard policy due to health reasons, but they want to maintain their coverage, they may be stuck renewing the current policy and stomaching the spike in premiums.

As an alternative, clients can consider converting some or all of their insurance to permanent coverage – if their policy allows it. Although permanent coverage is significantly pricier than term, the conversion enables clients to lock in permanent coverage without undergoing medical underwriting, typically at the same rates as individuals of the same age who buy a new policy.

When clients reach their mid-40s, Baker says, that’s generally a good time to urge them to consider converting their policy to a permanent one. “If they truly have a need for permanent insurance,” Baker says, “that is the time to start to consider that – before the cost of permanent insurance gets too high.”

For clients who are interested in converting just a portion of their coverage to a permanent policy, they can either eliminate the remaining term coverage and settle for a lower overall level of coverage or maintain the same amount of coverage with a combination of term and permanent insurance.

Some carriers provide more attractive conversion options than others, Shumak says. Manulife, for example, permits clients who do a partial conversion to carry over the remainder of their coverage as a term rider on a new permanent policy. The term on the rider restarts as of the effective date of the new policy, with premiums based on the client’s age at current rates for new business, but without additional underwriting.

“That [process] is significantly less expensive than if I rolled the [existing] coverage into the next term,” Shumak says.

He considers that strategy an attractive option when compared with many other carriers. With most companies, Shumak says, clients doing a partial conversion would be stuck with the time frame of their original policy for any term coverage they wish to maintain above and beyond the amount they’re converting. Depending on how many years are left in the term when clients make the conversion, they could face the higher level of renewal premiums much sooner, vs having the ability to restart the term.

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