Many consumers are approached by life insurance agents or life sales representatives and are asked to consider canceling their current life insurance policy in order to purchase a replacement policy. In most cases, the cash value of the current life policy is used to buy more insurance or a new policy. While a decision to replace an existing life insurance policy may be a good one, sometimes this may not be in your best interest. More than likely you purchased your policy with a long term financial plan in mind. Replacing or changing your insurance policy at this point may affect the intended results of your overall financial plan. If you are considering replacing or changing your life insurance policy, you should first assess your needs and determine what is in your own long term best interest. It is also important to consider the interests of those you are protecting. Deciding how much insurance you need, how long it is needed, and which policy provides the best coverage is crucial to your financial security.
Your financial needs should be thoroughly evaluated before changes are made in existing policies. Any change in your personal circumstances since you first purchased life insurance may require a different strategy. A comprehensive evaluation may indicate that replacing or changing your policy is in fact advisable. However, certain cautions are appropriate when considering replacing or changing your life insurance. For example:
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You may have to pay "start up" costs again.
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You may be required to wait one or two years before a new policy passes through the contestable period. During the contestable period the insurer is contractually entitled to cancel the policy or refuse to pay a claim based on mistaken or untrue statements in your application.
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You may pay a higher premium for new insurance over the duration of the policy because you are older than when you first purchased life insurance.
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The financial strength of a new insurer may be different from that of your present insurer.
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There may be specific tax consequences when you replace or change your current policy.
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You may find different loan provisions in a new policy, or you may find that you cannot take tax advantaged loans in the new policy.
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If you use the cash value of one policy to pay for the premium on a new policy, the values used may not be sufficient to support the new policy in future years, and may result in the need to make additional premium payments to keep the insurance in force.
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You may not have immediate access to your money in a new policy. You may have to wait a considerable period of time, or pay a monetary penalty, to access the cash value in the policy.
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Tax consequences may occur if you take cash from an annuity or mutual fund that started as a replacement policy for your original life insurance policy.
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When considering policy replacement, it is important to note that you may have the ability to amend or convert your current policy to a newer product within the same insurance company without any loss of rights or accumulated cash value. It may be in your best interest to contact your current agent or company and to inform them of your intent.
Illustrations are utilized by agents to highlight certain features of their policies. Illustrations should never be the only factor used in deciding to replace or change your policy. Illustrations that are presented for comparison purposes may not give a complete picture of the new policy’s future. To insure that your insurance policy meets your financial objectives, it is recommended that you obtain a second opinion, as well as consult with your current agent. Given the complexities involved in counseling a consumer regarding insurance purchases, you may want to inquire about your current agent’s and new agent’s professional qualifications
