When you leave an employer, continuing your group health insurance coverage is pretty straightforward: you either choose Cobra coverage, or you don’t.
Jump ahead to these sections:
- Overview: Life Insurance Portability vs. Conversion
- Life Insurance Portability vs. Conversion: Differences and Similarities
- Frequently Asked Questions
It’s a bit more complicated with group life insurance. Depending upon how the life insurance company and your employer selected and designed the plan, you may have three options available to you:
- Drop the coverage completely
- Port the coverage
- Convert the policy
Dropping the coverage is simple. You don’t complete any forms or sign anything. Typically, the day you leave your employer is the day your life insurance is no longer in force or the last day your premiums were paid up.
This article focuses on your other two options: portability and convertibility. We’ll look at similarities and differences and answer some of the most frequently asked questions concerning these insurance terms.
Overview: Life Insurance Portability vs. Conversion
Similar to Cobra, you have a 31-day window from the day your employment ends to exercise your portability or conversion option. Let’s look at both in greater detail.
If your group life insurance was term life insurance, you might have the portability option as a condition of the policy. Portability allows you to convert (or “port”) your group term life insurance policy into a personal term life insurance policy.
Unlike permanent life insurance, like whole life or universal life insurance, term life is only in force for a set term of years. If you die during that term, your beneficiary will be paid the death benefit. If you outlive the specified term, the policy expires without any cash value.
For example, let’s suppose when you started working for your former company five years ago, you were issued a 10-year term life insurance policy. When you left the company, there were only five years left out of the ten-year term. If you die within that period, a death benefit will be paid by the life insurance company to whomever you named as your beneficiary. If you outlive the policy’s total term of ten years and then pass away, no death benefit will be paid.
While you were employed, your premiums were paid via payroll deduction. When you take your life insurance policy with you when you leave, you’re responsible for paying the premiums directly to the life insurance company.
When your employment ends, you may also have the option to convert your term life insurance policy into a whole life insurance policy, or into a universal life insurance policy if it’s mandated by the state you live in. You can do this regardless of your current health status, which makes this an attractive option if your health has worsened since the original term life insurance you bought was issued.
Unlike the term life insurance discussed earlier, whole life insurance doesn’t expire—it’s permanent insurance you can keep for your entire life. A portion of the premium you pay each month goes toward the cost of the life insurance protection, and a portion goes toward building “cash value” within the policy.
You can borrow some of the cash value (the amount depends on what your policy states), but if you die with an outstanding loan balance, that balance will be deducted from the death benefit paid to your beneficiary.
For example, let’s assume you have a $100,000 whole life policy that you converted from your group term life insurance when you left the company. Over the next ten years, your whole life policy accumulates a sizable amount of cash value, from which you borrow $10,000.
If you pass away without paying back the $10,000 you borrowed from the policy, your beneficiary would receive $90,000 from the life insurance company as a death benefit ($100,000 death benefit—$10,000 outstanding loan amount.
Whole life insurance policies can also be “surrendered.” When you surrender a policy, you can receive cash from the cash value segment of the policy (the percentage varies by length of time the contract has been in force). Once surrendered, the policy is no longer in force.
Life Insurance Portability vs. Conversion: Differences and Similarities
We’ve covered the differences between portability and conversion in the overview above, except for one glaring difference: cost.
A term life insurance policy with the same death benefit as a whole life insurance policy will always be less expensive than the whole life policy. The reason is two-fold.
First, the cost of permanent life insurance is higher because it stays in force for as long as the insured wants it to, meaning the insurance company is much more likely to pay a death benefit to someone. Conversely, most term life insurance policies expire without ever paying a death benefit.
Second, term life policies cost less because no extra premium is going into a cash value portion of the policy since term life builds no cash value.
For example, let’s suppose you buy a $100,000 20-year term life insurance policy with a monthly premium payment being $40 per month. You also buy a $100,000 whole life insurance policy for $125 per month. There is an $85 per month difference in cost, with the term insurance being about a third as expensive as the whole life policy. The difference-maker is that the bulk of that extra $85 is going into the cash value of the whole life policy.
Portability and conversion are similar in that they both entail having life insurance coverage with a:
- Face amount of insurance
- An insured individual
- A beneficiary
- An insurer who issued the policy
- A monthly premium paid to the insurer
Frequently Asked Questions
If you still have questions about portability and convertibility, the answers may be below.
Now that my group life insurance coverage is ending, what is the maximum face amount I can continue carrying?
Portability may apply to all or a portion of your life insurance coverage amount. You can typically continue carrying 50%, 75%, or 100% of the amount of insurance that’s ending. However, there are total face amount maximums:
- Employee - $250,000
- Spouse - $50,000
- Children - $10,000
The benefits department where you work(ed) can provide you with the actual amount that is eligible for portability.
With conversion, the amount you can carry depends on the reason your coverage is ending. Under some circumstances, such as termination because of company acquisition, the full amount of your life insurance benefit may be able to be converted. Under other circumstances, such as termination for cause, the amount may be limited.
Do I need to answer medical questions or have a physical examination to continue my coverage?
Neither portability nor conversion requires any type of application or exam.
Will the rates for my new courage be different than the group life insurance rates I was previously paying through my employer?
Yes, for both portability and conversion.
Your employer can provide you with your portability rates, which may change based on the claims experience of the entire group of people who elect portability coverage.
With conversion, rates also change. You’ll now have a whole life insurance policy that accumulates cash value, instead of lower-price term life insurance that doesn’t accumulate any cash value. If your life insurance policy contains an option whereby you can elect to have a one-year term life insurance policy before your permanent coverage starts, the rates for that one-year term policy will be lower than the rates for the whole life policy which follows after the first year.
My current policy includes a disability waiver of premium rider. Can I still have that rider with my new policy?
Not with portability. It’s not available primarily because the life insurance company doesn’t know how hazardous your next job might be, which doesn’t allow them to figure how much extra premium to charge you.
If you’re disabled before you convert your term life policy over to a whole life policy, you want to maintain the disability waiver of premium rider if it’s allowed by the insurer. It will protect you against future disabilities.
How long will my coverage continue?
With portability, coverage can typically continue until the first of these three occurs:
- You reach age 75
- You enter active full-time duty in the armed forces of any country
- The last day for which you paid your life insurance premium
Coverage also normally terminates if the group policy for the entire group of people who elect portability terminates.
With convertibility, because a whole life insurance policy matures at age 100, at which point the policy’s cash value is paid out to you, coverage won’t terminate. If you decide to continue coverage at age 100, you can use the policy’s accumulated cash value to pay future premiums.
Also, with convertibility, coverage doesn’t terminate if you enter active military service and the coverage doesn’t include a war exclusion.
Are there any exclusions with my new policy?
Yes, there is one exclusion shared by portability and conversion. It’s called a “suicide clause.” No death benefit will be paid if death is due to suicide during the first two years of coverage. If there is death by suicide during the first two years, any unused premiums will be refunded.
What type of life insurance policy will I be issued upon leaving the company?
If you choose portability, you’ll bring your term insurance along with you when you leave the company. It will stay in force for a set term of time, after which it will expire if no death benefit has been paid to your beneficiary. Premiums are set in five-year age bands and increase whenever you reach the next five-year band.
If you choose convertibility, your term life insurance policy converts to a whole life or universal life insurance policy. These permanent policies not only have a death benefit component, but they also accumulate cash value, which can be borrowed during the years you have the policy. If you die before repaying the loan, any unpaid amount is deducted from the death benefit, meaning your beneficiary is going to receive less money than you had originally intended.
Take Advantage of Your Option to Keep Your Life Insurance
Regardless of the amount and type of life insurance you have available when you leave your employer, take it with you if at all possible. Many people have declined portability or conversion when they left their employer, then found themselves sick or injured and not able to qualify when they wanted to buy individual life insurance.
The best time to find a life insurance policy is when you’re healthy, and your rates go up as you get older. So, take advantage of having the option and keep your life insurance in force.