Portability vs. Conversion Life Insurance At a Glance
Portability and conversion refer to two ways of retaining an employer-sponsored life insurance policy following the policy’s termination. While they are used to accomplish similar goals, the methods differ greatly.
Portability refers to an insured keeping a soon-to-terminate policy in force by changing the policy from an employee-sponsored policy to an individual policy. For example, an employee who is retiring and their group policy will lapse at the end of their employment. That employee may have the option to keep–or port–that policy so that they may retain coverage.
In contrast, conversion refers to the employee converting the policy from one type to another. For example, an employee has a temporary term policy that will run out upon their retirement. To avoid losing coverage, the insured may convert the policy from a temporary policy to a permanent one.
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Losing an Employer’s Life Insurance Coverage — Explore Your Options
Having group benefits, such as group life insurance, is a great perk that some employers provide their employees. However, there can be some drawbacks that need to be considered. Most of the time, when you are enrolled in a group life policy, you do not own the policy. That means the company you work for owns the policy, and you are simply the insured. Also, most group policies are term policies, meaning that they end up on your termination or retirement within the company.
However, if the policy you are provided with has convertibility or portability provisions, you may be able to retain coverage after leaving the company. With the portability option, the insured could port the policy from the group policy into an individual policy. With the convertibility option, they can convert the term policy into a whole life policy and retain the coverage.
Portability vs. Conversion
| Ported Life Insurance Policies | Converted Life Insurance Policies | |
|---|---|---|
| Policy Types | Term Life | Whole Life |
| Eligibility | May have eligibility requirements based on different plans;Health questions if raising coverage | No eligibility requirements to meet |
| Cost/Rate Changes | Lower price than conversion | Higher price than porting |
| Coverage Length | Temporary; usually ends at age 70 | Lifetime coverage |
| Benefits Comparison | Low cost; can increase coverage | Guaranteed cash value; possible dividends |
| Disadvantages | Not permanent, no cash value | Higher cost |
| Ideal Candidates | Younger Insureds losing coverage who want an affordable option | Insureds losing coverage who want a permanent Plan with cash value |
| Requirements for Applying | Completed application must be submitted within 31 days of the end of employer-sponsored life insurance |
What Are Ported Life Insurance Policies?
A ported life insurance policy is one that is part of a group plan but has been ported, or changed, to an individual plan. This usually happens when an employee is leaving their employer, either voluntarily or involuntarily, and they have the option to retain their life policy.
Generally, the only type of policy that can be ported is a term policy. This is because policies offered through an employer are part of a group policy, and are more often term policies. In rare instances, a company may offer whole life as a group benefit, but it is not the norm. Not all companies offer portability on group policies.
There is a possibility that at the end of employment, an employee will not be able to or does not desire to retain the coverage they had with their employer, and may need to look for coverage from a private insurance company instead.
Eligibility
Generally, the only types of policies that can be ported are term policies offered through an employer. To be eligible to port the policy, the employee must have terminated their employment, retired, or dropped below the required number of hours to receive benefits. The employee may also be able to port the coverage for their spouse or dependents as well.
On most portable policies, there are a few eligibility requirements that must be met to port the policy such as the employee must be under a certain age–usually 70 years old–they must have worked at their place of employment for a certain amount of time prior to leaving the job, and they must not have any life-threatening illnesses at the time of porting.
These requirements for portability may vary from company to company and not all group policies offer portability. However, to port the policy, an employee must do so within 31 days from their last day of employment.
What Are Converted Life Insurance Policies?
In contrast to a ported policy, the type of policy changes with converted life insurance. As previously mentioned, when an employee is provided life insurance through their job, it is usually a term policy. Some of those policies have a convertibility option, which allows the employee to not only retain their coverage after leaving a job but also change it from a term policy, which is a temporary policy, to a permanent policy.
Eligibility
On most term to permanent conversions, the conversion is guaranteed. There may be a few health questions that the employee must answer, but overall, the process is fairly simple. Just as with ported policies, converted policies may have some eligibility requirements, such as time with the company, that they must meet before they can convert their group policy.
The employee must also convert their policy within 31 days of leaving their employment.
Ported vs. Converted Coverage Length
Ported Life Insurance Policies | Converted Life Insurance Policies | |
|---|---|---|
Coverage Length | Coverage for a limited amount of time or until a certain age; usually age 70 | Lifetime coverage |
Most of the time, the permanent policy is converted to a whole life policy. This is a type of life insurance policy that offers lifetime coverage and also has a cash value component – a sum of money that builds up within the life policy that the insured can access while still living.
While this type of policy may be more expensive than a term policy, the term policy will likely end when the insured reaches a certain age and offers no cash value or living benefits. The employer may offer the ability to convert the spouse’s and dependent’s coverage as well.
Ported vs. Converted Cost Changes
Ported Life Insurance Policies | Converted Life Insurance Policies | |
|---|---|---|
Cost/Rate Changes | Lower initial price than conversion; Price may increase over time | Higher initial price than portable; price remains the same |
It is important to know the difference in price points when looking to port or convert a policy. The group policy through the employer may be offered at a very minimal cost. If the insured wishes to port the policy, the premium may stay low initially. However, often these types of term policies have an increasing premium meaning that the price may increase at certain ages.
In addition to the price raising, some term policies also lower the coverage at certain ages. So, porting a policy may result in an initially low price but with increasing premiums and decreasing coverages.
With the conversion option, the initial premium may be higher compared to porting over the term policy. However, the premium on the converted policy will stay the same, and the coverage will also not decrease.
Which Should You Choose: Port or Convert?
Every employee’s situation is different, and they must decide for themselves whether to port their policy, convert their policy, or cancel it altogether. There are some situations where one option may be better for them than the other.
Choose to Port If…
When it comes to porting a policy, this could be ideal for an insured who is younger in age and needs a larger amount of coverage for a short amount of time at a lower price. It could also be ideal for those who want to keep the term policy for now and look at converting it down the road.
When deciding if porting the policy is the best option, the following should be considered:
- How long will the coverage stay in force?
- When will the premium increase and to what amount?
- Does the death benefit decrease and at what age?
- Is it still possible to covert the policy later?
Choose to Convert If…
When it comes to converting a policy, this could be a better option for someone who wants to lock in their rate and coverage. This would especially be good for someone older in age because most ported policies lapse at 70. It is also ideal for someone who can afford a higher premium and wants to build a cash value.
When deciding if converting the policy is the best option, the following should be considered:
- What is the premium and is it affordable long term?
- How much coverage is being provided?
- Will the policy gain cash value?
Compare Key Benefits
Portability
There are several benefits to porting over the existing term policy that is already established with the employer.
- The insured can increase or decrease their coverage
- The policy can be canceled at any time
- The spouse’s and dependents’ policies can be ported over
- The price may be better than a converted or stand-alone policy
- Eligibility health requirements are not usually strenuous
Conversion
When looking at the benefits of converting a policy, there are several there as well:
- The coverage can be decreased
- The policy can be canceled at anytime
- The premiums stay the same over the lifetime of the policy
- Spouse’s and dependent’s policies can be converted over
- Cash value accumulates within the policy
- Conversion is usually guaranteed regardless of health issues
Compare Disadvantages
Portability
Although there are many advantages to porting the term policy, there may be some disadvantages as well. Such as:
- If the coverage is being increased, qualifying health questions must be answered
- The riders on the original policy, such as accidental death, may not stay in effect
- Premiums will increase over time and coverage may be decreased
- No new dependents can be added
Conversion
When converting the policy, there are some disadvantages that the insured should consider.
- The policy death benefit cannot be raised
- The policy must be converted to a whole or universal life insurance policy
- No new dependents can be added
- Higher premiums
How to Do It: Port or Convert
An employee may talk to their benefits department to see what options are available to them in regard to porting or converting their life policy when they leave their job.
Whether an insured is wanting to port or convert their policy, there are some steps that must be taken to do so. It is important that these steps are done in a timely manner and must be done within 31 days of the employee’s last day of employment for both converting and porting a policy.
How to Port a Policy
If an insured decides to port their current term policy, they should use the following steps:
- Speak with their benefits department to get the proper application and rates
- Decide on what amount of coverage to port
- If raising the coverage, answer any health or eligibility questions
- Submit the application and premium payment
How to Convert a Policy
If the insured decides that converting the policy would be the best option, here is what they should do:
- Speak with their benefits department to get the proper application and rates
- Decide on what amount of coverage to convert and to what type of policy (if applicable)
- Submit the application and premium payment
When to Skip Porting or Converting Altogether
In some cases, neither porting the policy nor converting the policy will be the right option. While they are both great options to have, there are some situations where canceling it altogether may be best, such as:
- The insured is young and in great health. If this is the case, the insured may decide to purchase a policy from a private company or put off life insurance altogether. They may be able to get better rates elsewhere or have no need for a life policy at that moment.
- The insured already has another life insurance policy. Often, consumers will purchase a policy outside of their employment. If this is the case, the outside policy may be what they consider their primary coverage, and they have no need for another policy.
- The insured has no need for life insurance. Sometimes, the insured simply does not have a need for life insurance. Although more people need it than not, there may be situations where it is not needed. For example, an employee that is retiring and has all their debts paid for, including their burial expenses, may not need life insurance
What It All Means For You
When an employee leaves their employment, often they are worried about the benefits that they will lose. The option to port or convert their group life insurance policy gives them the ability to keep that coverage. Both options have advantages and disadvantages.
When deciding what is best for them, a consumer must look at all options. If keeping temporary coverage in force at a low cost is the best option, porting would be the way to go. If locking in long-term coverage at a higher rate sounds better, converting would be the better option. With either option, the insured can keep their coverage without a lapse.