Thursday, February 25, 2016

Group Life Insurance Conversion and Portability Explained

As simple as some insurance terminology seems, it's easy to get confused about what terms actually mean in the whole grand scheme of things. One area that employers and employees often get confused about are with the words we use to describe what happens to their life insurance when they leave employment.

Those words are convertibility, portability and permanent. So let's define these terms and then talk about them in more detail as to where we people get misled.

  • Convertible Convertible refers to the ability to change a policy from a term policy to a whole life policy.
  • Portable Portable means that you can continue a term or whole life insurance policy after you leave employment.
  • Permanent Permanent means that you can take it with you and it stays the same.

The Term Conversion Option

Group term life insurance will sometimes have a conversion option that allows you to convert your term policy to a whole life policy. Depending on the plan, this conversion will have to take place in the first month after separating employment.

Although, I'm probably one of the few people that's actually converted group term for an employee, what you can convert to is pretty much a mystery to most people since it's an option that is rarely exercised.

Let's talk about a few of the reasons why it's not.

  • It's a time sensitive option Because conversion has to take place within the first month, and it's rare, it often gets overlooked. I know when I separated employment on my last job, I was hardly clued in on my Cobra options or what was going to happen to my 401(k) for quite a while after I left. It's quite likely that the conversion option will expire without people even knowing they could do it.
  • You might be older when you seek to convert Most potential term life insurance convertors are older when they look at converting so the rates are significantly higher because their age.
  • Higher than expected rates Insurance companies aren't stupid. They know that only sick people will convert and because of that, price it much higher so people either can't afford it or to discourage it.

As you can probably guess, conversion, while it's there, isn't used much but can be used to those who pay attention and need it.

Portability - A Misunderstood Term

Back in the old days, you either converted your group term life insurance when you left employment or it expired.

But then one day, some voluntary group term life plans became portable when you left employment. What this mean is that not only could you take your whole life or universal life policies with you, but you could also now take your voluntary term with you as well.

Typically though, you are no longer part of the original group and are thrown into another pool of separated employees where the plan works somewhat the same but the rates might be marginally different.

In the end, however, group term insurance will either expire someday or if it's age banded, you'll get priced out of it because the rates escalate at older ages.

Now the problem with portable term insurance is that people confuse the word portability with permanent coverage. I'll often hear employees say that well, I can take my term insurance with me, meaning they think they can always keep it and it won't ever change -- but that's not the case.

The other problem is that like the conversion option, it's also time sensitive and gets overlooked or forgotten.

So while the concept of portability is good, employees often get misled into thinking they will always have it -- which is unlikely.

Permanent Coverage

Permanent coverage means you can always keep it at the same rate. Although this doesn't necessarily guarantee lifetime coverage (like in the case of some universal life insurance policies which might lack guarantees), if it's a fully guaranteed whole life plan it will mean exactly that. That's the difference between term and whole life insurance. You can always keep it.

For employees who want lifetime coverage, the permanent coverage that fully guaranteed whole life insurance provides is an important feature for them.

Convertibility, portability and permanent coverage are all important options. Just make sure that you and your employees understand that people rarely convert and not to mistakenly believe that just because you have a portability option doesn't mean that it's permanent coverage.

As always, it's important to review the specifics of the group plan you have in place because every plan is different.

For more problems employees might encounter with their group term life insurance, check out my article on the eight most common problems with group term life insurance.

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Michael is a champion of guaranteed issue for employees in the workplace. He's been an insurance agent since 1992 and has worked with thousands of employees.