Advisors would be wise to make sure that clients in group insurance plans are aware of their plan’s conversion option. Exercising this option may be a crucial step that will allow clients to retain life insurance coverage if they are thrown out of work, leave their employers to establish independent businesses or if they retire.

Group plan members typically are not subject to health assessments required for life insurance purposes. But once they are no longer plan members, they could find that they cannot acquire life insurance for health reasons, thereby losing valuable protection for themselves and their loved ones.

In general, the conversion option allows former plan members to convert their existing life insurance coverage to individual plans without having to provide evidence of insurability, which entails a medical exam. The conversion option must be exercised within 31 days after the group coverage terminates; otherwise the privilege is lost.

“Too many things can happen to render someone uninsurable,” says Tim Landry, director of living benefits with MSA Financial Services in Montreal. An individual may develop any of a number of health risks without knowing it and may not be eligible for individual life insurance when he or she chooses to obtain such coverage, he adds.

Take the case of Pamela Chung, an independent practice-management consultant living in Markham, Ont. At age 45, she decided to take a year off after leaving her previous job prior to setting up her own consulting business. Like most individuals who belong to a group plan, she had the option of converting her group coverage to an individual plan. But she decided against it.

“I figured that I could easily purchase life insurance on my own whenever I wanted, and chose not to exercise the group conversion option,” says Chung. She was willing to undergo a medical exam and wanted the flexibility to shop around for the lowest possible cost insurance when she needed it.

But what Chung did not know is that her health had deteriorated and she had become uninsurable. “I could not get life insurance coverage when I was ready,” she said. “I felt cheated. It never crossed my mind that I would be uninsurable at such a young age.”

Under the conversion option, the insurer may place a maximum limit on coverage offered, taking into consideration the amount of group coverage provided by the employer and any optional life insurance held by the employee as part of the group plan. Normally, the insurer may also offer the employee the opportunity to purchase an individual policy based on evidence of insurability in addition to the amount provided under the group plan.

One drawback to exercising the conversion option is its relatively high cost. Premiums are higher — typically by 10%-25% — than those on similar individual policies available from other companies because of the greater risk created by not requiring medical exams.

For instance, using quotes provided by LifeGuide, life insurance software offered by CompuOffice Software Inc. of Richmond Hill, Ont., a 50-year-old male who is a non-smoker in good health can purchase the lowest-cost term-100 insurance policy at a preferred annual premium of $1,026.84. However, the same individual will be required to pay a standard annual rate of $1,109.64, or 8% higher, for a conversion policy. Comparatively, a 50-year-old female who is a non-smoker in good health will pay a preferred annual premium of $822.84 for the lowest cost term-100 policy, and a standard premium of $888 for the conversion policy.

The highest cost of a similar policy for the same individuals is $1,748 annually for a male and $1,380 for a female, with both the standard and preferred rates being the same. Clearly, there are huge price differences in the market.

“A lot of people do not choose the conversion option because it is the more expensive route. They must pay standard rates and forgo preferential premiums, which are generally lower,” says David Barber, past president of the Independent Financial Brokers of Canada and president of Piper Barber Insurance Agency Inc. of Toronto. “Typically, people who choose the conversion option know that they are uninsurable.”

The price difference between conversion insurance and regular insurance “can be significant,” says Landry. The conversion premiums, also higher than for group coverage, are based on current individual rates linked to age and gender at the time of conversion. “However, some individuals do not have a choice and must use the group conversion option,” says Landry.

@page_break@Ron Persaud, 48, a Toronto-based entrepreneur, is one such individual. “I knew that I may not qualify for individual life insurance when I left my job to set up my own business,” says Persaud. “I did not want to take a chance because of my health problems, which were not necessarily serious but would have raised red flags with any insurer.”

Although significantly more expensive than individual term insurance, Persaud says, “Having the protection gave me peace of mind.”

In his case, he did not want to apply for individual insurance and be denied coverage for health reasons.

Barber advises that if uncertainty about an individual’s medical condition exists, it is not unusual to apply for individual as well as group conversion coverage at the same time, within the stipulated 31-day time period. “If individual coverage is denied following a medical examination, the group conversion coverage is always available as a fall-back option,” he says.

However, it would be better not to apply for individual insurance if there is a strong possibility of denial of coverage because the denial becomes a permanent record that is accessible by all insurers, says Barber. This can pose problems for the individual in the future should his or her medical condition improve because of advances in medicine and health care.

Another concern with the conversion option is that the choice of products available is limited, cautions Landry: “Certain products are designed exclusively for the conversion option.”

According to Barber, conversion options vary widely among companies. Until recently, only one-year term and term-to-65 insurance were made available by insurers. However, whole life and universal life have been added more recently. IE