The Term Conversion

Did you know that hidden in the fine print of practically every Term Life Insurance Policy in Canada there’s a powerful clause? Depending on the insurance company it goes by different names: most commonly a Term Switch or a Term Conversion (Which we’ll use here). The excellent news is that with sophistication and proper planning, you can leverage it to great effect.

So what exactly does this clause say? A term conversion clause essentially says that within the first five years (sometimes seven) of your ten-year Term Insurance policy, you can convert it into a fresh twenty year policy without providing evidence of insurability.

This is extremely powerful because it means that buying a simple 10 year term policy can effectively guarantee that you are covered for 25 years total. As the fifth anniversary of your insurance policy approaches, you can contact the insurance company and ask for them to convert it into a fresh 20 year term contract. The new contract starts fresh, so you get to take your initial 5 years and add it on to the new 20, bringing you to 25 years total. If you’re 35 years old, this gives you basic coverage until you are 60, which accounts for the lion’s share of your peak earning years.

You can in fact buy a 25 year term if you wanted, but If you are concerned about costs, this is an excellent choice. Term 10 insurance policies are significantly cheaper than Term 25s and it allows you to save a lot at the start of the contract.

What’s more, it provides you with flexibility. There is a good chance your circumstances change in the next 5 years. Planning to leverage the conversion clause means that you are prepared for a wider range of scenarios. With flexibility comes control, and control is the key when it comes to personal finance.

Another large benefit of this clause is guarding against the risk that you lose something called “insurability”. Insurability is the ability for you to be able to qualify for life insurance. Insurance companies calculate your risk, and if the risk to insure you is too high, they’ll deny you coverage. Any time you apply for a new insurance policy, they do their due diligence, analyze your health profile, and make a decision. With the term conversion clause, you aren’t writing a new policy, you are making a change to the old one. Because of this key difference, you won’t need to fill out any new medical forms, will avoid the potential for tests and exams, and you eliminate the risk that your health might have deteriorated since the start of the policy.

Planning to use this clause as a flashpoint in your insurance picture, also is an excellent excuse to sit down and seriously consider your greater plan. With the help of Citron Insurance, you’ll have the lay of the land.

Typically, at the 5 year mark - we will recommend that our clients try and execute the conversion. There are some more sophisticated scenarios available however, like moving the insurance to a permanent policy. In some scenarios, we’ll take multiple actions - start the process of executing the conversion while also reapplying for a brand new Term 10 coverage. If you’re healthy and the math works out, we can get you that fresh term policy and start the process anew. There are countless options and strategies to help you optimize your finances.

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