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  • Ask questions before replacing a life insurance policy
  • August 5, 2013
  • Tony Steuer

    By Tony Steuer, CLU, LA

    Life insurance is complex financial tool, which is unique in the way it provides financial stability and security for an insured’s beneficiaries. With this being said, every decision about one’s life insurance policy should be carefully looked over.

    Replacing one’s life insurance policy for another policy is one of the biggest decisions you can make. It could either be a very good or very bad decision.

    Before replacing your policy, ask yourself the following questions.

    What do you wish a new policy to achieve that your existing policy does not?

    Make sure that your new desired needs are tangible and still in your price range. Also, is discontinuing your life insurance policy worth these new objectives? Replacing your life insurance policy means starting from the beginning, which entails paying the first-year expenses (i.e., agent commission, issue and underwriting) for the second time.

    Have you contact the current company to see if the existing policy can be modified to meet the desired needs? 

    Ask yourself the following questions before replacing your existing life insurance policy.

    Policy performance may actually be quite competitive, if all insurers have experienced the factors negatively affecting this performance. For example, the dramatic fall in interest rates over the last 20 years has lowered the returns of all traditional whole life and universal life policies to one degree or another.

    What are the benefits of each policy?

    Difference in the underlying investments of the old and new policies may make rate-of-return comparisons difficult or misleading, especially if the proposed new policy is variable and equity investments are contemplated in place of the old insurer’s fixed-income-oriented investment portfolio.

    Investment returns obviously need to be adjusted for comparable risks and other factors affecting product performance – mortality, expenses and lapse rates – need to be considered as well.

    With a policy comes a new suicide clause and incontestable period. Is that worth replacing your policy?

    The suicide clause and incontestable period is a policy provision, which the company agrees not to contest the validity of the contract after it has been in-force for a certain period of time, usually two years. On the rare occasion, the replacing insurer may waive them.

    Will the replacement qualify as a tax-free exchange under the Internal Revenue Code Section 1035?

    This section allows for certain exchanges of life insurance to be made without the immediate recognition of gain. It allows the tax, that otherwise would be imposed on lump-sum disposition of certain policies and annuities, to be postponed.

    Will you be able to qualify both financially and health-wise for the new coverage?

    If you decide to replace your life insurance policy, you will have to go through another underwriting process and possibly a medical exam.

    Have you been urged to borrow from a current policy or policies to finance the new coverage?

    This is not a good idea and you should see outside help. Contact your adviser or insurance company if this is the case.

    What happens to the death benefit in the replacement proposal?

    Is this replacement proposal that attempts to increase the death benefit for an existing premium or to lower the premium for an existing death benefit, by guaranteeing a death benefits – but only to a certain advanced age, such as 95 or 100.

    Purchasers of “permanent” insurance want their policies to be “permanent” and not to expire before their do, if they happen to live an especially long life.

    If you seek further assistance or additional information, please feel free to email me at editor@lifequotes.com.

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.

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Questions & Answers on Life Insurance by Tony Steuer, CLU, LA, CPFFE is licensed under a Creative Commons Attribution 3.0 Unported License.

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