- How can I replace a permanent life insurance policy?
- August 6, 2013
Because of the cash-value elements and its complexities, it is much more difficult to analyze a permanent life insurance policy in a potential replacement situation. Also, there are many different types of permanent policies.
However, for the purpose of the worksheet provided here, we will use the generic term “permanent life insurance” to refer to any policy that builds a cash value, including whole life, universal life, variable life, variable universal life, and other variations.
Please note that the use of the word “illustrated” in this worksheet means that results are not guaranteed.
An illustration is nothing more than a projection, which is based on a bundle of assumptions that may or may not occur in real life. That does not mean that life insurance companies are guilty of misrepresenting information to customers.
Quite the contrary, the truth is that neither the insurance company nor any person knows the future, so we have to make intelligent guesses. The result is a so-called linear or deterministic projection.
An illustration may assume an interest-credited rate of 6 percent. However, in the real world, interest rates fluctuate, so that 6 percent illustrated rate is not realistic, even if it is a perfectly reasonable assumption.
A truly realistic illustration would have to assume a constantly variable interest rate, which is virtually impossible.
Keep in mind that different companies use different assumptions in preparing illustrations, which should never be solely used to compare policies.
State insurance regulation require – for you protection – that both the proposed replacing company and your existing company prepare current illustrations for your consideration in making an intelligent replacement decision.
These illustrations will show the effects of the surrender charge on the existing and proposed policies.
In situations where the current policy will be modified, but not terminated, comparisons should include in-force ledgers (illustrations) of the policy before and after the change, if available.
Reduced-scale illustrations – illustrations showing lower interest rate crediting assumptions – should be provided on both existing and proposed policies to demonstrate the effects of volatility on the performance of non-guaranteed policy element under certain circumstances. These illustrations should also be consistent with those required by the NAIC illustration regulations, when applicable in your state.
This worksheet is intended for evaluation purpose only and is not a substitute for state replacement requirements.
Illustrations should never be the sole criteria for evaluating a replacement. This is because illustrated cash values and death benefits are never reliable predictions of future results. More information is needed.
It is recommended to find out the underlying assumptions for the current in-force illustration as well as for the proposed policy.
You should be aware that there might be differences in the assumption used by each company, which may render a comparison based upon some illustration invalid.
Also, keep in mind that replacement of an existing policy generally results in the reduction of cash-surrender value as a result of new acquisition cost.
About Tony Steuer
Noted insurance author Tony Steuer has spent over 25 years in the life insurance industry. Steuer’s leadership roles include serving on the California Department of Insurance Curriculum board and the National Financial Educator's Council Curriculum Advisory Panel as well as having served as President of the San Francisco Chapter of the American Society of CLU & ChFC, President of the leading Life Insurance Producers of Northern California, and as a board member of the San Francisco Life Underwriters Association. Mr. Steuer is the author of Questions and Answers on Life Insurance: The Life Insurance Toolbook, The Questions and Answers on Life Insurance Workbook and The Questions and Answers on Disability Insurance Workbook - the first two were awarded the “Excellence in Financial Literacy (EIFLE) Award from the Institute of Financial Literacy. Steuer holds a Chartered Life Underwriter (CLU) designation and also holds the Life and Disability Insurance Analyst License, a designation that is held by less than thirty people in California.
Questions & Answers on Life Insurance by Tony Steuer, CLU, LA, CPFFE is licensed under a Creative Commons Attribution 3.0 Unported License.