Group Life Portability & Conversion – Two Very Different Animals

There are different options for continuation of group life coverage and they can behave quite differently. Here is what you need to understand about portability and conversion.

Most group-sponsored life insurance plans include portability and/or conversion as options for those subscribers no longer qualifying for “active” coverage. While portability and conversion both offer a way to continue life insurance coverage, they are quite different with regard to when the insurance carrier will allow their use, the new underlying insurance contract and the amount/type of coverage allowed to continue.  
 
Portability
“Porting” coverage provides a continuation of group-based Term Life. The rates may differ from the active employee plan, since many carriers have a separate pool of subscribers for ported coverage. Premiums can also differ by smoker/nonsmoker status, even if the group’s active plan rates does not differentiate. Provisions included in group-based life coverage continue to apply, such as Waiver of Premium, Accelerated Death Benefits, and Age Reductions. The insured will be allowed to elect up to the maximum coverage they had prior to porting without health questions, although some carriers may give the option for the insured to answer a few medical questions in order to obtain preferred rates. If the member would like to change their election in the future, that is typically allowed. Rates can increase over time based on the ported pool and the age of the insured.
 
Conversion
“Converting” transitions group-based Term Life coverage to an individual whole life policy. Premiums are based on the person’s age and their risk class at the time of conversion; therefore, converting coverage can cost much more than porting coverage. Converted policies won’t include many of the contract upgrades of a group-based policy such as Accelerated Death Benefits and Waiver of Premium. In addition, the amount allowed to be converted will depend on the reason the active plan is being terminated for the individual. Finally, conversion policies typically will not allow changes to the elected amount in the future, and rates are locked in at the time of the conversion.
 
Quick Recall
I like to have a quick way to remember these two provisions.  Quite simply:

• Portability “ports” the coverage – it is just “docking” the term life policy in a different group-life pool with the carrier
• Conversion “converts” the coverage – it changes it from group term life to individual whole life

 
Restrictions
Both porting and converting come with restrictions as to when they can be used for continuing coverage. Limitations can include the reason active coverage is terminating, the amount of time the subscriber had to have been on active coverage and the amount of coverage allowed to be continued. As we review restrictions, note that we are providing typical limitations. Each carrier, and even each contract, can differ.
 
The best way to review restrictions is to ask why the person is losing the coverage. 

1. Terminating employment or reduction in hours – Portability may be available, up to the amount the member had on the “active” plan. The carrier will typically require that the person had been covered for at least a set number of months (such as 12 months).
2. Retirement – Usually Portability is not available; however, Conversion may be an option.
3. Disability – Usually Portability is not available; however, Conversion may be an option. Also review the policy’s Waiver of Premium provision, since active coverage may be able to continue for a certain amount of time (conversion would be offered at the end of that extended active coverage).
4. Employer’s plan terminates without any replacement policy – Conversion may be available, but only for those who had been covered on the policy for at least a set number of years (such as 5 years). The carrier will most likely limit the amount eligible for conversion (such as up to $5,000).
5. Employer’s plan changes the eligibility parameters under the policy – Conversion may be available, under the same provisions as when a policy is terminated altogether (see #4).

 
Scour the Contract
Portability and Conversion provisions can be different for every contract, even those written under the same insurance carrier. Here are the questions you need to answer when reviewing a contract’s provisions for both Portability and Conversion.
 

1. Which benefits can be continued (life and/or AD&D, voluntary plans)?
2. Which subscribers can continue coverage (employee, spouse, children)?
3. Does the employee need to have been covered on the life policy for a minimum time period to qualify (typically will be different based on reason for coverage ending)?
4. Does an employee need to be under a certain age to be eligible to continue coverage?
5. Can a retiree continue coverage?
6. When does a continued policy terminate?
7. What is the maximum amount of coverage allowed to be continued?
8. What is the minimum amount of coverage allowed to be continued?
9. Are there any disability restrictions whereby the member would not be eligible to continue coverage?
10. Are there any administration fees charged to the member for continuing coverage?
11. What is the deadline for applying for the continuation policy?
12. What is the deadline for paying for the continuation policy?
13. If the subscriber were to die during the application/payment period and had not completed the application/payment, would the policy pay out a benefit?

 
Notification
Those losing active life coverage need to be notified of their option to Convert and/or Port their coverage. Many employers assume that the insurance carrier provides this notification to terminating members; however, rarely is this the case. We recommend that the employer provide notice to employees. An exhaustive list of coverage options and restrictions is not required. The employer can simply provide a statement that includes:

• The date  active coverage will be ending
• A notification that the employee may have the option of porting and/or converting their policy
• The date after active coverage termination at which the election and first payment of premium must be completed the policy number(s)
• the carrier’s name and phone number for the subscriber to call for more information regarding options and premiums.

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The Bottom Line
Conversion and Portability are not interchangeable. They are quite different animals, used under different loss-of-coverage circumstances. It is recommended to have both provisions in every contract in order to provide employees (and their dependents if applicable) with options when their coverage terminates. This is especially important for those who may no longer be eligible to obtain individual coverage (or affordable individual coverage) in the marketplace due to their health status. You will also want to review the Waiver of Premium provisions of each contract since active coverage can continue during disability in some cases. But that is a blog for another day.    

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