#283 | The Scourge of Conversion-Only Products
I’ve argued before that a guaranteed conversion privilege is the most mathematically valuable part of a Term insurance policy – yes, even more so than the death benefit coverage itself. The chance that you’re going to die while being covered by a Term policy is less than the chance that you’re going to become less insurable or uninsurable over the same period of time. Conversion isn’t a sideshow. It’s the main thing. It’s the cheapest, simplest and most straightforward way to lock in permanent insurability. And, fortunately, death benefit coverage also comes along for the ride.
As attractive as conversions are for clients, they’re equally as challenging for life insurers. Out of a block of Term policies underwritten at Preferred Best, a very small percentage of folks will die, a larger percentage will become uninsurable, a much larger percentage would re-underwrite at a higher rate class and the remainder are in the same shape as when they were originally underwritten. Who is going to convert? Theoretically, anyone who is uninsurable and most folks who couldn’t get the original rate class if they went through underwriting before. But will they? And what about the folks who are as healthy as they used to be but just don’t want to go through the hassle of underwriting again? Conversions are simple in theory, but quite complex in practice.
Matters are made a bit more complex when you consider how conversions are positioned. The true-blue mutual companies have long seen term insurance as a gateway for younger clients to build a relationship with the company and the agent before converting their policy to a Whole Life – not because they’ve had a change in insurability but because they’re making more money and want to use Whole Life for its myriad of benefits. Those conversions are of a different ilk than the conversions at a company selling boatloads of Term in the independent market where conversions are predominately about insurability. So if a life insurer gets a conversion, is it a good conversion or a problematic one? That answer is going to vary by life insurer.
The simplest way to handle conversions is simply to blend them into the rest of the permanent block for the purposes of pricing and profitability. My dad once told me that when he was growing up, there was a saying that “the solution to pollution is dilution.” That’s more or less the mentality for term conversions and it works as long as you’re confident that the conversions are of the right sort – as with the mutual companies – or if conversions are a relatively small portion of sales. The unprofitable conversion sales can be diluted against the profitable underwritten sales. From my experience, that how most life insurers look at the problem.
But that only works if you have a little bit of pollution and a lot of dilution. For life insurers who have sold mountains of Term insurance and virtually all of their conversions are of the toxic sort, the solution to the pollution is not dilution. The solution is isolation. The carrier has to concentrate and isolate conversion business into a specific place, limiting the damage to the rest of the permanent product portfolio.
Enter the conversion-only permanent product, easily the most reviled product category introduced in the last 20 years. For agents, conversion-only products are a way for life insurers to escape from their obligations to their policyholders through the back-door, essentially following the letter but not the spirit of the contract. These products represent uncomfortable conversations that agents are going to have to have with clients who want to convert their policies and were under the impression that they would be able to convert to a street product because, as the agent told them, that’s what the insurer had been allowing for decades. Little wonder why these conversion products are so widely and vitriolically hated by insurance agents.
But are these products really so bad? That depends. As you might imagine, not all conversion products are created equally. For the purposes of this article, I looked at four – AIG Protection Extend IUL, John Hancock Conversion UL, Lincoln Conversion UL and Protective ProClassic Legacy 12/19. It’s worth noting that these products aren’t universally required for all converting policies at each company, but they are all examples of what conversion product pricing looks like. I also added Transamerica Lifetime Whole Life to give some perspective on non-participation Whole Life pricing for term conversions. Take a look at pricing across four different ages, all assuming a Preferred risk class.
|Carrier||Conversion Product||Age 45||Age 55||Age 65||Age 70|
|AIG||Protection Extend IUL||13,221||20,092||34,976||52,213|
|Protective||ProClassic Legacy 12/19||17,840||29,523||53,209||68,521|
|Transamerica||Lifetime Whole Life||19,300||30,570||48,860||59,190|
In terms of the raw premiums, Protective’s product takes the cake for highest pricing almost across the board, delivering premiums even higher than Transamerica’s non-participating Whole Life product. John Hancock isn’t far behind. AIG rings in with the lowest premiums, but it’s an indexed UL and I ran it at the maximum AG 49-A rate, which makes its premiums quite a bit more speculative than the rest. Without making an aggressive assumption about performance, Protection Extend IUL would be quite a bit closer to John Hancock and Lincoln.
For comparison’s sake, I chose four street products to square off against the conversion products – AIG Value Protector+ II, John Hancock Protection IUL, Lincoln VULone and Protective Lifetime Assurance UL. The two AIG products share a common chassis and make for an easy comparison. I chose John Hancock Protection IUL over Protection UL because Conversion UL shares most of its mechanical attributes with Protection IUL and doesn’t have a Persistency Credit like Protection UL does. I chose Lincoln VULone because that’s their most competitive death benefit offering at the moment. And, finally, I decided to go with a Guaranteed UL (Lifetime Assurance UL) for Protective.
So how much worse are conversion products than their street counterparts? Take a look at the table below showing the percentage increase for a level premium solve from the street product to the conversion product. For AIG, both products allocate to the same indexed account using the maximum AG 49-A illustrated rate. For Lincoln and John Hancock IULs, the allocation is 100% to the fixed account. All rates assume a Preferred class.
|Carrier||Street Product||Conversion Product||Age 45||Age 55||Age 65||Age 70||Average|
|Protective||Lifetime Assurance UL||ProClassic Legacy 12/19||226%||230%||234%||214%||226%|
|JH||Protection IUL 21||Conversion UL||158%||174%||192%||209%||183%|
|AIG||Value+ Protector II IUL||Protection Extend IUL||159%||148%||152%||165%||156%|
If you wanted to generalize, you might say that the price of having a conversion-only product compared to a street product is in the neighborhood of a 50% to 125% increase in annual premium. That is – ahem – not trivial. For the 65 year old, the underwriting class required to get the street product premium to match the conversion product premium is Table B for Lincoln, Table C for AIG, Table G for Protective, Table L (400%) for John Hancock. So much for preserving the benefits of the original underwriting class.
What’s different about the conversion-only products that pushes up their premiums so far above their street counterparts? Each product answers that question a little bit differently. Take a look at the COI slopes of the products as a percentage of PacLife PIA 6 COIs, which is the COI slope I think of as representative of a middle-of-the-road, not-lapse-supported offering for a mixed-use product for a 45 year old:
Protective, AIG and John Hancock are quite clearly relying on extremely high COI charges, especially in the initial durations. But over time, the COI slopes blend back into rates that look similar to one another and not so different from PacLife PIA 6. This makes a lot of sense. The mortality problems with conversions are short-term in nature. Any person who converts and lives for 30 or 40 years wasn’t uninsurable when they did the conversion. Long-term mortality in conversions should look virtually identical to underwritten mortality and that’s what we see with these COI slopes.
Except with Lincoln. Instead, their COI slope looks pretty similar to PacLife PIA 6 and, actually, pretty similar to the the street Wealth Preserve IUL product. The same goes for its policy charges, which are actually leaner than Lincoln’s street DB product Wealth Preserve IUL. Not only that, but Lincoln’s charges are leaner than the other conversion products as well, all of which have policy charges that are in-line with street products. In a lot of ways, Lincoln’s Conversion UL could provide a passable impression of a street life insurance product save one problem – its paltry 2% crediting rate. That’s the thing that separates Conversion UL from a street product. In fact, if you run Wealth Preserve IUL, Lincoln’s DB IUL product, in the fixed account at its current 2% crediting rate, the premiums aren’t much lower than Conversion UL. In the realm of conversion products, Lincoln Conversion UL is the least-worst solution, at least in terms of policy charges.
So far, we’ve been looking at a level premium solve to age 121, but is that really the best way to look at conversion products? For healthy clients who are using conversions for convenience then yes, it’s a good starting point. That may also be the case for clients who have slipped a notch or two in their rating class and are on the fence about whether to convert or go back through underwriting. But for clients who are now uninsurable, looking at an age 121 premium makes no sense. Their life expectancy has likely dropped dramatically and life insurance coverage at any price is a steal. For them, the question is how to pay as little as possible to keep the policy going for just as long as they’ll need it. Take a look at the pricing difference for 10 years of coverage versus a lifetime premium solve:
|Carrier||Conversion Product||Age 45||Age 55||Age 65||Age 70|
|AIG||Protection Extend IUL||7,941 (-39.9%)||13,560 (-32.5%)||29,760 (-14.9%)||48,695 (-6.7%)|
|JH||Conversion UL||10,374 (-26.4%)||18,933 (-24.1%)||36,108 (-21.5%)||53,071 (-19.7%)|
|Lincoln||Conversion UL||9,222 (-47.4%)||15,311 (-41.1%)||28,955 (-28.6%)||43,778 (-18.4%)|
|Protective||ProClassic Legacy 12/19||6,960 (-61%)||12,828 (-56.5%)||32,520 (-38.9%)||46,200 (-32.6%)|
|Transamerica||Lifetime Whole Life||19,300 (0%)||30,570 (0%)||48,860 (0%)||59,190 (0%)|
Lincoln, AIG and John Hancock all have minimum premium requirements for at least the first 5 years that are designed to keep the policy in-force even though the surrender value is zero. But after the first 5 years, the surrender values are generally sufficient to maintain the policy and the premiums could drop even lower that the figures above. Or, put differently, paying the 10-year premiums above might actually maintain coverage for much longer. But either way, these products provide a surprising level of flexibility in premium given that minimally funding these products is the easiest way to arbitrage the life insurer – except for Whole Life. Little wonder why many life insurers have shifted towards offering non-participating Whole Life as the only conversion option, including my former employer.
There is no doubt in my mind that we’re going to continue to see carriers figure out ways to eliminate or devalue term conversion privileges with conversion-only products. But don’t despair. For many clients, going back through underwriting isn’t the end of the world. And for clients who have to convert because of limited insurability, they should be thrilled to get coverage at any price – especially if you can figure out how to reduce the initial premiums as much as possible. But the best solution is to sell Term from a company that has contractual guarantee to allow conversion to any permanent product for sale at the time of conversion and, fortunately, there are still a few of those products hanging around.