Renewable and Convertible Features in Term Policies

Exclusive of the term covered, term policies are of two main kinds: (1) those which grant insurance only for the specified term and are renewable only upon a satisfactory medical examination; and (2) the renewable-term policy, the conditions of which give the holder the option, at the expiration of the first-term period or at the end of any subsequent term period, to renew the policy without a medical examination and irrespective of the insured's health at the time of renewal. The renewal of the policy, in other words, can be effected by the insured by paying the premium for the age then attained. Usually, however, the companies limit the age (generally 55 or 60 years) at which such renewal term policies may be issued, and in some instances the number of renewals permitted is limited. Where the term policy contains no renewal privilege the insured may be placed at the disadvantage at the end of the term, of being without insurance and of not being in a position, because of poor physical condition, to secure a renewal of the contract or to obtain any other form of life-insurance protection. In many instances, also, the particular contingency which the term policy was designed to cover, may still exist at the expiration of the term, thus making highly desirable the privilege of renewing the contract for one or more terms at the will of the insured and without the possibility of denial on the part of the company.

Nearly all term policies also contain the so-called convertible feature, i.e. the privilege on the part of the insured of converting the policy into another type of contract upon a proper adjustment being made in the premium charge. Some companies extend this conversion right throughout the term period, but the great majority grant the right only for a limited number of years, such as the first four, five, or seven years of the term. Conversion is usually allowed into whole-life, limited-payment, or endowment insurance. The exchange is usually allowed on any anniversary of the policy luring the period when conversion is permitted, and may be effected in one of two ways. The new policy may bear the date of the surrender of the original policy and the premium thereon be that required for such new policy at the attained age of the insured. Or, the new policy may be considered as bearing the date of the original policy, in which case the insured is usually required to pay to the company the difference between the premiums which would have been paid on the new policy if it had been issued at the same time as the original policy, and the premiums paid thereunder for the same amount of insurance, with interest on such difference at a certain stipulated annual rate. 1

The advantages of the conversion privilege become apparent if we consider the disadvantages usually attaching to term insurance. At the time of taking out the policy the insured may not have definitely selected the type of policy best adapted for his needs. Following the issuance of the term policy his circumstances may soon become such as to enable him to take out adequate permanent insurance. Or he may desire to utilize insurance as a means of accumulating an estate rather than to use it entirely for protection against death. As soon, therefore, as he concludes that term insurance does not meet his present and future needs he may carry out his conclusions by exchanging his term contract for one on the whole-life or endowment plan in either of the two ways already suggested. Moreover, another great value of the conversion privilege also becomes apparent (where the policy does not contain a renewable privilege) when it is remembered that a considerable percentage of the insured lives become physically impaired to such an extent during even the first five or seven years following the issuance of the contract as to make impossible the securing of any other plan of life insurance in a reliable company. Tinder such circumstances a non-renewable term policy may, because of its expiration before death, fail utterly to protect the insured. If, however, the policy contains the conversion privilege, and if the time limit for making an exchange of the policy for a whole-life policy has not yet expired, the insured will certainly want to take advantage of this privilege and thus protect himself against the possibility of his insurance expiring before death occurs.

1. According to another method the "exchange may be made as of the age and date of issue of the original policy, regardless of the attained age of the insured, upon payment of the difference between the reserves upon the respective policies".