Replacing your life insurance policy?

happy retired couple
  • Prior to underwriting, you'll be asked about your existing policy.
  • Cash-value policies can be more complex and costlier to replace.
  • Make sure the new life insurance policy is a reasonable one.

There are many reasons you may want to replace your current life insurance policy with a new one. A new policy may offer better coverage at a lower cost, you may feel more confident in the agent or insurance company, or your needs may have changed, prompting you to think about a different policy -- whole life instead of term life, for instance.

However, when you apply to replace your current life insurance policy with a new one, you'll likely encounter a peculiar little mambo that doesn't exist around the replacement of auto or homeowners insurance.

Prior to underwriting, you'll be asked about any existing policies. Be prepared to answer questions such as these on your application:

  • Do you currently have a life insurance policy?
  • If so, what is the policy number, insurance carrier and policy expiration?
  • Do you plan to replace your current policy with your new one?

This section of the life insurance application can puzzle cautious consumers. Why does a new insurer need to know these details? Will your answers affect the terms offered? Could a wrong answer give your insurer "contestability" -- a reason to void the policy and deny benefits to your survivors?

The good news is these questions are aimed at protecting you and letting both insurers know you're busting a policy move.

Method to the mambo

"The main, if not the only purpose of those questions is to protect the consumer and in some small way, the insurance company against agents who would persuade the customer to buy a new policy for no other reason than to reap a new commission," says Steven Weisbart, senior vice president and chief economist with the Insurance Information Institute. Regulators call that "churning."

Unlike property and casualty insurance, life insurance can involve cash values, waiting periods, surrender fees and other complexities that can cost unwary consumers if they rush or are rushed into a new policy solely based on a more attractive premium or death benefit.

To that end, the insurance industry tries to police over-aggressive salespersons, "churning" agents, ill-informed financial advisers, con artists and consumers who try to deceive or over-purchase life coverage, by ringing a bell whenever a replacement is imminent.

"The companies are required by the state insurance departments to send out replacement forms to the ceding insurer, the one being replaced," says Tony Steuer, author of "Questions and Answers on Life Insurance." "In some states, including California, once you reach age 65, they're required to give more lengthy information to the consumer because people can be talked into doing anything."

Ron Herrmann, senior vice president for distribution and sales at The Hartford, says the paperwork required of both the new and ceding insurance company varies from company to company and state to state.


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