insurance

Replacing your life insurance policy?

Life insurance replacement tips
  • Be sure to have a new policy in effect before you cancel your old policy. That will give you time to review it and make sure it meets your needs.
  • You pay most of the fees and costs of a new life insurance policy upfront. Be sure the money you save on a new policy will be worth paying these upfront costs once again.
  • Consider the tax consequences of dropping your old policy before committing to a new one.
  • Premiums on your new policy may be higher, or you may not be insurable under the same conditions, based on your age or changes to your health.
  • Be sure to compare your rights and benefits under your new policy against the old one; they may not be the same.
  • You can save time and money by amending or adding to your current policy instead of replacing it.
  • Most new policies have a waiting period before certain kinds of death benefits become effective. Consider this before replacing your old policy.
  • If you're on the fence about replacing your old policy, ask your insurance agent or company for an illustration of how it has performed for you and its projected benefits moving forward.
Source: National Association of Insurance Commissioners' Life Insurance Buyer's Guide.

How the insurer's concerns affect you

Term life replacement tends to be straightforward. Since there are no cash values involved, the main hurdles involve insurability (think medical exam), ability to pay the premiums and a reset on the waiting period, which is usually a two-year stretch when your policy won't pay for death by suicide. You may also be setting the clock back to zero on your contestability period -- the time during which the insurer can cancel your policy for false statements on your application -- and your conversion period, during which you can convert your term policy into a cash-value one.

Annuities and cash-value policies, such as whole, universal and variable life products, can be more complex and costlier to replace because they often involve surrender charges, 1035 exchanges and the use of policy loans to fund a new life insurance policy.

However, the replacement mambo involves more than mere consumer protection. Your new insurance company has a stake in your answers as well. Their first concern: Can you afford the new policy if you don't cancel the old?

"There are upfront costs to issuing a policy, and it will take a while before the total revenues exceed their initial costs," says Weisbart. "If you buy a new policy, they want to be somewhat confident that you will pay premiums long enough to make this a profitable transaction for them."

The second concern: Is this an appropriate amount of insurance based on your financial information? "The insurance company doesn't want to give me $30 million in insurance when I'm only worth $1 million," Herrmann says.

Weisbart says such a move to overbuy coverage sets off other alarms as well. "If a person has more than reasonable coverage on his or her life, that may present an incentive to someone to turn this life insurance policy into a claim," he says. "While life insurers are happy to sell coverage, they are not in the business of creating financial incentives for people to die."

If you don't know whether you will cancel your old policy once the new one is issued (never do so beforehand), should you say you are replacing the policy on your application?

"Yes, you're supposed to," says Steuer. "The reason they do that is, you're not required to actually replace the policy. The new insurance company can't force you to actually replace the policy that you promised to replace nor can they use that for contestability. They can't contest because they can't force you to give up the policy."

Weisbart says to be safe, make sure the life insurance policy you seek is a reasonable one.

"If you have a schoolteacher who is applying for $10 million in insurance and there's no apparent reason for that amount of money, I could see a rejection," he says.

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