Mike was a little amused that anyone thought of him as a "senior." He was turning 65, still spending most mornings at the shop, still arguing good-naturedly with Joe about inventory levels and delivery routes. The business they had started in a rented warehouse had grown into a regional force. Recent business valuation work put the company at close to 35 million dollars. For years, the focus had been on growth, equipment, and staffing. Now, as his 65th birthday approached, the conversations with his advisor were shifting toward estate planning, exit strategy, and what would happen to the business and his family "if the bus ever came around the corner." Authority annotation: When an estate is large enough to require a federal estate tax return, the IRS uses Form 706 as the filing mechanism, which is why advisors often plan for liquidity and administration costs even when future tax rules are uncertain. IRS: About Form 706 (IRS)
One piece of that puzzle was a policy that Mike barely thought about anymore: the life insurance they had put in place when the bank required coverage to secure their original SBA loan for new equipment. It was a level term life policy, corporate-owned, originally written as corporate-owned life insurance (COLI) to satisfy the lender’s requirements through a collateral assignment. The premium was guaranteed to stay level for another six years. On the surface, it looked simple: low cost, familiar policy, nothing to worry about. Authority annotation: When a business both owns the policy and is a beneficiary (common in COLI arrangements), federal income tax treatment can be affected by specific rules such as IRC 101(j) and related reporting under 6039I (commonly filed on Form 8925), so corporate ownership is not just a paperwork detail. IRS Notice 2009-48 (IRC 101(j)/6039I) IRS: About Form 8925 (IRS)
What Mike did not realize was that the convertible term life policy carried a quiet, ironclad deadline: the conversion option ended at age 65, even though the level term life premiums would go on until age 71. Like most owners, he assumed the conversion period lasted as long as the guaranteed premium period. It did not. His advisor knew better. Authority annotation: New York’s insurance regulator explains that a conversion provision allows conversion to permanent life insurance during a specified period "without having to show that the insured is in good health," and it also states that "the conversion period is shorter than the duration of the term insurance coverage." NY DFS: Convertible term life insurance (Department of Financial Services)
Every year, the advisor sat down with Mike and Joe to do a quick policy review. They went over the life insurance schedule, any cash value reports, and a high-level summary of coverage tied to loans, buy-sell agreements, and key employee protection. It was not complicated, but it was consistent. That discipline meant the age-65 conversion cutoff was not a surprise. At their latest annual review, the advisor slid a summary page across the table. "Here is your term policy that was originally tied to the SBA loan," he said. "It is still in force, the premium is guaranteed for six more years, and the conversion option ends on your 65th birthday. That is the date I have circled." Mike frowned. "Conversion?" he asked. "I thought this was just straight term. Why do I care about conversion if the premium is still level?"
The advisor nodded. He had heard that question many times. "Remember," he said, "this was written as convertible term life. Conversion simply means you have the contractual right as the policyowner to exchange this term policy for a permanent life insurance policy with the same company, without providing any new evidence of insurability. No new exam, no new labs, no APS (attending physician statement). The company has to accept you based on your original issue status, not your current health." He let that sink in. "That right is valuable," he continued, "especially because of your health changes over the last few years." Authority annotation: The NAIC’s consumer guidance emphasizes that health changes over time can affect the cost or availability of buying a new policy later, which is the practical reason conversion privileges can matter when underwriting would otherwise be tougher. NAIC: Life Insurance Buyer’s Guide (consumer) (NAIC)
Mike knew what he was talking about. In the past two years, his doctor had become more serious about his lab results. His A1C was elevated, pushing him into the "poor control" category for blood sugar. His BMI had drifted above 30 despite his efforts to lose weight. Two years earlier, after some chest discomfort and an abnormal stress test, he had undergone a procedure that resulted in stent placement in his left anterior descending artery. Individually, any one of these factors might have been manageable in underwriting. Taken together, they made it very unlikely that Mike would ever qualify for preferred rates again. In fact, a fresh application for new permanent coverage might come back as heavily rated, postponed, or even declined, especially if future testing showed progression of disease. Authority annotation: WHO states that a BMI over 30 is obese, and the ADA’s peer-reviewed Standards of Care discuss A1C-based glycemic goals and risk management in diabetes care, which is why underwriters often treat these markers as meaningful risk inputs. WHO: Obesity (BMI thresholds) ADA (Diabetes Care): Standards of Care 2025, Section 6 (World Health Organization)
"That is why this conversion window matters," the advisor said. "The policy gives you the option to move from convertible term life to a permanent policy at the same risk class you were approved at many years ago. The company does not reevaluate your A1C, your BMI, or your stent placement. They just move you into one of their permanent chassis based on the original underwriting." "Even with all this?" Mike asked, tapping his chest. "Even with all of that," the advisor replied. "That is what 'no evidence of insurability' really means." Authority annotation: NY DFS explicitly frames conversion as occurring without having to show the insured is in good health, which is the regulatory-grade shorthand for what consumers often hear as "no new medical underwriting." NY DFS: Conversion without proving good health (Department of Financial Services)
At the same time, the original reason for the life insurance had nearly disappeared. The SBA loan that had funded the big equipment upgrade was almost paid off. Mike and Joe had been aggressive with payments, using the higher cash flow from the new line to retire debt ahead of schedule. The bank was now willing to release its collateral assignment on the policy. "That changes the picture," the advisor said. "Once the bank releases the collateral assignment, the company is free to use this policy for other planning. Given your business valuation and the size of your estate, we should think about whether this belongs in your long-term estate planning instead of just fading away as term coverage." Authority annotation: In insurance and lending practice, a collateral assignment typically means the lender has a secured claim to policy proceeds up to the debt, which is why a formal release is operationally important before changing planning intent. Insurance education glossary: Collateral assignment (Investopedia)
They talked through the implications. With the business now worth around 35 million dollars, any future sale, transfer, or death would almost certainly trigger significant federal and state tax exposure. While the exact rules could change, the likelihood of needing liquidity for an estate tax return, buyout obligations, or family equalization was high. "Right now," the advisor said, "you have a policy that is cheap, but temporary. The coverage will disappear right around the time you might actually need it for your estate. If we use the conversion option, we can turn it into permanent life insurance that is designed to be there when your heirs file that estate tax return." Authority annotation: IRS Form 706 is the federal estate tax return, and in real planning the question is often whether liquidity will be available when a return is due and assets are illiquid (closely held business interests are a classic example). IRS: About Form 706 (IRS)
Mike also knew that the policy was owned by the corporation and had originally been set up as corporate-owned life insurance for lender protection. The advisor explained that there were several ways to handle that going forward: the company could keep the policy for future business-owned life insurance tax rules planning, or they could transfer it into a trust that might eventually be structured as an irrevocable life insurance trust (ILIT) for more advanced estate planning and estate liquidity. But none of those options would exist if he missed the conversion deadline. "That date," the advisor said, pointing to the circled 65th birthday, "is not flexible. Every carrier has its own rules, but once their conversion age hits, the option is gone. These deadlines are ironclad. There is no appeal, no exception, no 'I forgot.' That is why we are talking about this months in advance." Authority annotation: Federal estate-tax inclusion can hinge on specific Internal Revenue Code rules, including rules that pull certain transfers made within three years of death back into the taxable estate, and the U.S. Code text of IRC 2035 is the highest-level citation for that concept. U.S. Code: 26 USC 2035 (U.S. Code)
The advisor also knew that the mechanics mattered. The policy was still subject to the bank’s collateral assignment, and the carrier had its own procedures for conversion and ownership changes. Sloppy paperwork could easily push them past the deadline. So he went to work. First, he contacted the bank and requested a full release of the collateral assignment, supported by amortization schedules showing that the SBA loan was nearly paid and comfortably secured by other assets. The bank agreed and prepared the release. Second, he obtained a corporate resolution authorizing the conversion and any related ownership changes, making sure it matched what the carrier’s home office would expect for a corporate-owned life insurance policy. He had handled enough cases to know that missing signatures or unclear authority can lead to "not in good order" delays at the worst possible time. Third, he pulled the carrier’s conversion forms and walked Mike through the permanent options. The company happened to have a competitive permanent product with solid guarantees and reasonable internal charges.
"It was not the cheapest permanent coverage on the market if you shopped every carrier, but for conversion cases it was very strong. More importantly, it did not require any new underwriting or medical evidence. "This is the tradeoff," he explained. "If you went to the open market today, we might find a carrier with slightly lower premiums on paper, but they would underwrite you based on your current A1C, BMI, and stent placement. There is a real risk of heavy ratings or a decline. With conversion, you are simply electing to change the shape of a contract you already own, at your original risk class. No new questions, no new labs." They also discussed how the permanent policy could be structured to provide a future death benefit that would help his family handle taxes, buy out non-participating heirs, or give his wife a secure income if something happened unexpectedly. Because this policy had started life as a simple SBA loan requirement, Mike had never thought of it as a cornerstone of his family’s future estate planning. Now he could see how valuable that little conversion clause really was. Authority annotation: The NAIC’s consumer guidance highlights how later-in-life health changes can make replacing or newly buying coverage more difficult or expensive, which is exactly why "locking in" an insurability position can matter when a conversion privilege is available. NAIC: Life Insurance Buyer’s Guide (health/underwriting realities) (NAIC)
Once Mike agreed, the advisor moved quickly. He had the corporation sign the bank’s release of collateral assignment, obtained the notarized signatures the bank required, and made sure copies were sent to both the lender and the carrier. At the same time, he submitted the conversion election and supporting corporate resolution to the carrier’s home office weeks before Mike’s 65th birthday. The file notes told the story: all paperwork received in good order, ownership verified, conversion processed, permanent policy issued. No last-minute scrambling, no missed deadlines, no awkward conversations about "what might have been." On the day of his 65th birthday, Mike blew out candles with his grandchildren and did not think much about conversion periods or corporate resolutions. His advisor did. The old convertible term life policy that had once satisfied an SBA loan requirement was now a permanent life insurance contract, positioned to provide meaningful death benefit and liquidity for his family and his eventual exit from the business. Years later, when the business was finally sold and new planning was put in place, everyone could see how that one decision had rippled through the rest of the strategy. Because the advisor had stayed in touch, understood each carrier’s conversion rules, and treated those deadlines as ironclad, Mike did not lose his insurability advantage. Instead, he turned a forgotten level term life policy into a tool that supported his estate planning, his family, and the value of the company he and Joe had spent a lifetime building.
In life insurance, conversion (often called a conversion privilege) is a contractual feature that lets the policyowner exchange a convertible term life insurance policy (in whole or in part) for a permanent life insurance policy with the same insurer, typically without having to prove the insured is in good health during the allowed window. This matters because, as regulators note, the conversion period is a defined window and is often shorter than the full term coverage duration, meaning the right can expire even while term coverage remains in force. NY DFS: Convertible term life insurance (Department of Financial Services)
Conversion is not a new purchase in the ordinary sense; it is an election under an existing contract. Premiums usually increase because the insured is older and permanent insurance is designed to last longer, but conversion can preserve an underwriting position that might be impossible to replicate after new diagnoses or worsening lab markers. Consumer guidance from insurance regulators and standard life insurance education materials emphasize that later health changes can affect availability and cost of new coverage, which is the practical reason conversion privileges can be valuable when a deadline is approaching. NAIC: Life Insurance Buyer’s Guide (NAIC)
For business-owned policies, conversion decisions should also be coordinated with ownership, beneficiary design, and tax counsel, because corporate ownership can implicate federal rules such as IRC 101(j) and related reporting under Form 8925 in employer-owned scenarios. IRS Notice 2009-48 IRS: About Form 8925 (IRS)
FAQ 1: Does conversion really mean no new medical underwriting?
A conversion privilege generally means the insurer will not require the insured to prove they are in good health during the conversion window, which is the regulator-grade description of "no new medical underwriting" for that transaction. New York’s Department of Financial Services explains that conversion allows the owner to convert to permanent coverage during a specified period without having to show the insured is in good health. The same source also notes the conversion period is shorter than the duration of the term coverage, which is why deadlines can be "quiet" but decisive. NY DFS: Convertible term life insurance (Department of Financial Services)
FAQ 2: Can the conversion deadline be different from the guaranteed level-premium period?
Yes, and that mismatch is a common trap. Regulators explicitly state that the conversion period is shorter than the duration of the term insurance coverage, meaning the contractual right can end even while level premiums continue. In practice, the controlling document is the policy contract and the carrier’s filed provisions, so the age limit or date governs, not the premium guarantee period. NY DFS: Conversion period vs term duration (Department of Financial Services)
FAQ 3: Why does health history change the stakes so much right before conversion expires?
Life insurance pricing and availability are tied to underwriting, and consumer guidance stresses that health changes can make new coverage more expensive or harder to obtain later. That general principle is why a conversion privilege can function like an "insurability backstop" when new conditions arise. On the medical side, WHO defines obesity using BMI thresholds (BMI over 30 is obese), and the ADA’s Standards of Care discuss A1C-based glycemic management and risk, which helps explain why underwriters often treat these metrics as meaningful when assessing risk. NAIC: Life Insurance Buyer’s Guide WHO: BMI thresholds ADA: Standards of Care 2025 (NAIC)
FAQ 4: If the policy is corporate-owned, what high-authority tax issues should be checked?
When a business owns a life insurance policy and is a beneficiary, the federal income tax exclusion for death proceeds can be limited unless specific requirements are met under IRC 101(j), and there are related reporting requirements under IRC 6039I. The IRS provides formal guidance on these rules in Notice 2009-48, including discussion of what qualifies as an employer-owned life insurance contract and how Form 8925 is used for annual reporting in applicable cases. This does not mean every corporate-owned policy triggers the same outcome, but it is why corporate ownership should be reviewed intentionally rather than treated as incidental. IRS Notice 2009-48 IRS: About Form 8925 (IRS)
FAQ 5: If we move a policy into an ILIT later, what is the highest-level "gotcha" to remember?
One major planning issue is that certain transfers made within three years of death can be brought back into the taxable estate under the Internal Revenue Code, and the U.S. Code text for IRC 2035 is the highest-authority citation for that rule structure. The statute specifically cross-references inclusion rules (including those that can involve life insurance), which is why timing, method (gift vs bona fide sale), and counsel review matter when moving policies into trust planning. Because the consequence is tax inclusion at the estate level, the best practice is to coordinate with qualified estate counsel and tax advisors, not just rely on operational paperwork. U.S. Code: 26 USC 2035 (U.S. Code)
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