If you already have a life insurance policy, you’re thinking strategically about how to protect your family and interests in the event that you are no longer around.
But what do you do if that policy no longer works for you? There are many reasons that may happen, but the important thing to know is that it is possible to switch to a new life insurance policy. Let’s take a look at what that entails, and the pros and cons of making the change, to answer the question: can you switch life insurance policies?
Reasons to switch life insurance policies
If you’ve already got a good policy, why the sudden interest in switching life insurance companies? There could be any number of reasons, including the following:
- You believe you can find better coverage or cheaper premium rates with another company.
- You’ve had a bad experience with your insurance company and no longer want to work with them.
- Your needs have changed: your children have grown and no longer need support, you’ve gotten divorced or your current level of coverage is no longer necessary.
- You’ve decided to switch from a term policy to whole life insurance to take advantage of the cash value — or, conversely, you’d like to cancel your whole life policy for the simplicity of term.
- You’ve reached the end of the term policy, but still need coverage of some type.
- You can no longer afford the premium payments.
Whatever the reason, you might find that your previous plan isn’t what you want.
How to switch your life insurance
There are a few steps to take when switching your life insurance. Follow this process:
- Choose the type of life insurance you want. The first step is to choose if you want term or whole life insurance. Term insurance lasts for a certain period and may require a medical exam. These policies can also be more expensive as you get older. 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.
- Determine how much coverage you need. After you determine how long you want your policy to be based on which type of policy you get, you need to decide how much coverage you want. Consider how much money it would take to replace your current household income several times over to ensure your beneficiaries will be taken care of after you’re gone.
- See if you can adjust your policy instead. After you know what changes you want, talk to your current insurer to see if there’s a way to adjust your policy to what you want. It might not be an option, but it doesn’t hurt to ask. This tip is particularly helpful if you want to switch from term to whole life insurance because some providers offer that feature.
- Make sure your policy is active. Always purchase your new policy and make sure it is active before canceling your old policy. You don’t want a gap in coverage. There may be a waiting period before your new policy will pay out on some claims, and there is generally a two year contestability period when your insurer can deny or contest claims. Check this information before you switch over.
Don’t be afraid to ask questions as you go along to make sure you’re getting what you want out of the switch.
Life insurance replacement tips
When you switch your policy, there are a few tips to keep in mind:
- Look at upfront fees. You pay most of the fees of a life insurance policy upfront. Be sure the money you save on a new policy will be worth paying these upfront costs once again. “There are upfront costs to issuing a policy, and it will take a while before the total revenues exceed their initial costs,” says Steven Weisbart, senior vice president and chief economist with the Insurance Information Institute. “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.”
- Pay attention to taxes. Consider the tax consequences of dropping your old policy before committing to a new one.
- Know that prices may increase. 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.
- Compare benefits. Be sure to compare your rights and benefits under your new policy against the old one; they may not be the same.
- Consider changing the policy first. You can save time and money by amending or adding to your current policy instead of replacing it.
- Note the waiting period. Most new policies have a waiting period before certain kinds of death benefits become effective. Consider this before replacing your old policy.
- Talk to your current provider. 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.
By doing these things, you can avoid mistakes that could cause you to pay more money over time.
Tips for purchasing the right amount of coverage
Another concern is choosing 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,” says Ron Herrmann, senior vice president for distribution and sales at The Hartford.
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.