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.
Portability – A Misunderstood Term
As always, it’s important to review the specifics of the group plan you have in place because every plan is different.